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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File Number 0-26866
SONUS PHARMACEUTICALS, INC.
(Exact name of the registrant as specified in its charter)
DELAWARE 95-4343413
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22026 20TH AVENUE SE, BOTHELL, WASHINGTON 98021
(Address of principal executive offices)
(425) 487-9500
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTON 12(b) OF THE ACT:
Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.001 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of February 1, 2000, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the Registrant was $39,411,715 based on the
closing sales price of $5.00 per share of the Common Stock as of such date, as
reported by The Nasdaq National Market. As of February 1, 2000, 8,990,354 shares
of the registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed in
connection with the solicitation of proxies for its 2000 Annual Meeting of
Stockholders to be held April 27, 2000 are incorporated by reference in Items
10, 11, 12, and 13 of Part III hereof.
PAGE 1 OF 62 PAGES
EXHIBIT INDEX APPEARS ON PAGE 57
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SONUS PHARMACEUTICALS, INC.
TABLE OF CONTENTS
PART I PAGE
Item 1. Business.............................................................. 3
Overview........................................................... 3
Imaging Overview................................................... 5
Ultrasound Imaging................................................. 5
SONUS Technology and Products...................................... 8
Strategic Alliances................................................ 10
Status of Clinical Trials.......................................... 12
Marketing and Distribution......................................... 13
Manufacturing...................................................... 14
Research and Development........................................... 15
Government Regulation ............................................. 15
Competition........................................................ 18
Patents and Proprietary Rights..................................... 18
Product Liability.................................................. 20
Human Resources.................................................... 21
Certain Factors that May Affect Our Business and Future Results.... 22
Item 2. Properties............................................................ 29
Item 3. Legal Proceedings..................................................... 29
Item 4. Submissions of Matters to a Vote of Security Holders.................. 30
PART II
Item 5. Market for the Registrant's Common Stock.............................. 31
Item 6. Selected Financial Data............................................... 31
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............ 39
Item 8. Financial Statements and Supplementary Data........................... 39
Item 9. Changes In and Disagreements with Accountants......................... 39
PART III
Item 10. Directors and Executive Officers of the Registrant.................... 56
Item 11. Executive Compensation................................................ 56
Item 12. Security of Ownership of Certain Beneficial Owners and Management..... 56
Item 13. Certain Relationships and Related Transactions........................ 56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....... 57
SIGNATURES...................................................................... 61
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PART I
ITEM 1. BUSINESS
OVERVIEW
SONUS Pharmaceuticals, Inc. is engaged in developing proprietary ultrasound
contrast agents and drug delivery systems for use in the diagnosis and treatment
of heart disease, cancer and other debilitating conditions. Ultrasound imaging
is a widely used, non-invasive, cost-effective technique used to examine soft
tissues, internal body organs and blood flow in the body. While contrast agents
are widely-used in most other imaging modalities, ultrasound imaging is
currently largely performed without the use of a contrast agent. Our first
product under development, EchoGen(R) (perflenapent injectable emulsion), is a
contrast agent designed to be administered to a patient prior to performing
ultrasound studies to improve image quality. To date, over 2,200 patients and
volunteers have participated in clinical trials of EchoGen. We believe that
EchoGen will significantly improve the effectiveness of ultrasound imaging by
increasing the reflectivity differential between the bloodstream which carries
the contrast agent and the surrounding soft tissue being imaged.
EchoGen is a stable, liquid emulsion based on our proprietary
PhaseShift(TM) technology, which changes from microscopic liquid droplets of
dodecafluoropentane ("DDFP") to gas microbubbles upon activation prior to
patient administration. We believe that EchoGen has the following
characteristics which we believe will provide physicians and sonographers the
capability to improve ultrasound imaging:
o long persistence which will allow physicians sufficient time to
complete an EchoGen-enhanced ultrasound study;
o limited attenuation (partial or total image blackout) allowing better
image quality for physician analysis;
o administration through a single bolus injection not requiring multiple
injections or infusions during the course of an ultrasound
examination;
o convenient configuration in a non-refrigerated product kit with all
required materials for patient administration, and;
o safety profile resulting from preclinical and clinical trials
conducted to date
The above product characteristics have been established through our
clinical trials. However, there can be no assurance that characteristics
inconsistent with those from our clinical trials will be encountered in future
use of the product. See "Certain Factors That May Affect Our Business and Future
Results - Unproven Safety and Efficacy; Uncertainty of Clinical Trials."
In 1996, we filed a New Drug Application ("NDA") with the U.S. Food and
Drug Administration ("FDA") for the approval to market EchoGen in the U.S. Since
the NDA filing, we have had the following material correspondence with the FDA
related to the filing:
o In February 1998, we received an action letter from the FDA which
indicated that the EchoGen NDA was considered inadequate for approval
and cited certain deficiencies in the application;
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o In August 1998, we submitted an amendment to the FDA in response to
the February 1998 FDA action letter;
o In October 1998, we were notified by the FDA that the amendment filing
was considered complete;
o In April 1999, we received an "approvable letter" from the FDA. The
approvable letter provided the conditions that must be satisfied
before final approval of echocardiography indications; and
o In September 1999, we submitted a formal response to the conditions of
the approvable letter. The FDA has notified us that it expects to
complete its review of our response by March 2000. Although it is
inappropriate for us to speculate on the outcome of the FDA review, we
believe we have addressed the conditions set forth in the approvable
letter.
No assurance can be given that the FDA will review the response to the
approvable letter in a timely manner or that the FDA will ultimately approve the
NDA. See "Certain Factors That May Affect Our Business and Future Results -
Uncertainty of Governmental Regulatory Requirements; Lengthy Approval Process."
A Marketing Authorization Application ("MAA") was submitted to the European
Medicines Evaluation Agency ("EMEA") in 1996 for the approval to market EchoGen
in the European Union ("E.U."). Since the MAA filing, we have had the following
material correspondence with the EMEA related to the filing:
o In July 1998, the EMEA granted a marketing authorization for EchoGen
in the 15 countries of the E.U. on EchoGen for use as a transpulmonary
echocardiographic contrast agent in patients with suspected or
established cardiovascular disease who have had previous inconclusive
non-contrast studies;
o During 1998 and 1999, we submitted to the EMEA certain variations of
our marketing authorization to bring the manufacturing process and
specifications for European product in line with the process and
specifications submitted to the FDA for approval in the U.S.
o In 1999, we received notifications that the variations to our
marketing license were approved by the EMEA with the final
notification received in December 1999.
In addition to EchoGen, we are also applying our proprietary technology to
research and develop therapeutic products and additional diagnostic products. In
1997, we initiated development of a second ultrasound contrast agent, QW7437.
Preclinical and clinical studies have suggested that QW7437 may have improved
persistence in grayscale imaging of blood flow in tissue compared to EchoGen or
other fluorocarbon-based contrast agents.
We are also investigating the application of our technology in the
development of drug delivery systems for therapeutic products. Our strategy is
to apply our proprietary technology and capabilities in emulsion formulations to
improve the bioavailability and reduce the toxicity of water insoluble
compounds. Our plan is to enter into feasibility study agreements with companies
who own active compounds, typically large pharmaceutical companies, to determine
if our drug delivery strategy enhances their active compound. In December 1999,
we entered into our first feasibility study agreement. Under this feasibility
study agreement, we have agreed to use our reasonable best efforts to develop
new formulations of an active compound and provide them to the pharmaceutical
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company for further evaluation. If the feasibility study is successful, our
goal is to negotiate a development and license agreement with the pharmaceutical
company. There can be no assurance that this feasibility study or any new
feasibility studies will result in development or license agreements.
IMAGING OVERVIEW
Medical imaging to diagnose and treat disease states and conditions has
been an important element of medical treatment since the introduction of x-ray
technology. As imaging technology has advanced in recent decades, applications
of medical imaging have expanded to address increasingly complex disease states
and conditions involving soft tissues and internal body organs. Medical imaging
currently plays an important role in the diagnosis and treatment of disease
states and conditions affecting the vascular and nervous systems and major
organs such as the heart, kidney and liver. Industry sources indicate over 90
million soft tissue and organ imaging studies are performed annually in the U.S.
The most widely used imaging modalities for soft tissues and organs include
ultrasound, computed tomography ("CT"), magnetic resonance imaging ("MRI"),
nuclear medicine and x-ray angiography. Each requires specialized equipment and
has different patterns of use and applications. The imaging modality to be used
is selected based on a variety of factors, including the particular disease
state or condition to be studied, image quality, the cost of the study and the
status of the patient in the patient management cycle. The use of
image-enhancing contrast agents, which is crucial to some imaging modalities and
has greatly clarified images obtained with others, has broadened the number of
imaging applications. A contrast agent is a substance that is administered to
the patient, typically intravenously or orally, to enhance the image by
increasing the visibility of the blood vessels or body cavities, as well as
other tissues and organs containing the contrast agent. It is estimated that
approximately 33 million imaging studies utilizing contrast agents are performed
annually in the U.S.
ULTRASOUND IMAGING
Ultrasound for medical imaging purposes is a safe, non-invasive and
relatively inexpensive method to provide images of most major soft tissues and
organs. Initially used to image the general shape, size and structure of
internal soft tissues and organs, advances in technology and scanning techniques
have expanded its use to areas such as imaging of blood flow in soft tissues,
organs and the vascular system as a means of determining the presence of a
disease state or condition. Based on published reports, we believe that
approximately 70 million ultrasound imaging procedures are performed annually in
the U.S., of which a majority are for cardiology and radiology indications.
Cardiac ultrasound, known as echocardiography, is used to assess the
structure and function of the heart, providing information that assists the
physician in the diagnosis and treatment of coronary artery disease, valvular
disease and congenital heart defects. In an ultrasound study for radiology
indications, the physician attempts to image soft tissues and organs such as the
liver or kidney and to identify abnormalities and obstructions of the major
veins and arteries of the body.
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According to published reports, there are nearly 80,000 ultrasound systems
installed in the U.S. in a majority of hospitals and clinics as well as in many
physicians' offices.
Ultrasound systems use high-frequency sound waves to produce real-time
images. The sound waves emitted by the ultrasound transducer, which is placed on
the skin or in a body cavity near the targeted area, are reflected by tissues
and fluids, thus allowing the physician to view, characterize and define tissues
and organs. The reflected sound waves, or echoes, are received and processed by
the ultrasound system and displayed in real-time on the system's monitor. The
intensity of the echoes received by the ultrasound system is proportional to the
acoustical reflectivity of the tissue or fluid. With standard ultrasound
imaging, known as grayscale for radiology applications or two-dimensional ("2D")
for cardiology applications, the physician can diagnose and monitor disease
states and conditions by analyzing the relative shading of tissues or organs.
In 1984, color Doppler ultrasound system enhancements were introduced that
apply the principle that the frequency of sound waves reflected by moving
objects is altered in proportion to their velocity (a Doppler frequency shift).
These enhancements allow physicians to assess the hemodynamics (blood
circulation through the body) of the patient based on the direction and speed of
blood flow through the body as well as in the chambers and valves of the heart.
However, since the velocity of blood flow measured by the Doppler ultrasound
transducer is dependent upon the angle of the blood vessel in relation to skin
surface, the use of Doppler enhancements for certain applications, such as the
imaging of the renal artery, which is parallel to the skin, has been limited.
The use of "power" Doppler systems, which are capable of measuring the variation
of the intensity of signals that have undergone a Doppler frequency shift, has
improved the diagnostic utility of ultrasound imaging systems by reducing much
of the angle dependence of earlier generation Doppler systems and by allowing
the imaging of smaller vessels and vessels with lower blood flow than could be
imaged effectively with earlier systems.
Beginning in 1996, the manufacturers of ultrasound equipment introduced
systems with the optional capability to perform a new technique called harmonic
imaging. Harmonic imaging utilizes the nonlinear properties of ultrasound
contrast agents by transmitting sound waves at the fundamental transducer
frequency but receiving at the first harmonic, which is twice the fundamental
frequency. Because ultrasound contrast agents can act as non-linear resonators,
they generate a harmonic signal. With an ultrasound system capable of receiving
harmonic signals, this technique enhances the distinction between tissue and
blood and extends the persistence of ultrasound contrast agents. Ultrasound
equipment manufacturers continue to develop system software designed to take
advantage of the unique properties of contrast agents and more recent
developments have included: power harmonic imaging, flash echo imaging, pulse
inversion imaging and real time perfusion imaging. However, all of these
techniques are currently available only on premium priced ultrasound systems and
most of the installed base of equipment cannot be upgraded. As a result, the
majority of the installed base of ultrasound equipment is not capable of
performing these new techniques as of the end of 1999.
Despite such advancements in ultrasound equipment, ultrasound imaging
without the use of contrast agents often produces images that are less defined
and more difficult to interpret than images produced by other imaging modalities
such as CT and MRI. For example, the depth and
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angle of certain organs or vessels within the body limit the use of ultrasound
imaging because of the inability to receive echoes from deep within the body and
the inability to see the entire length of certain vessels such as the renal
artery. In addition, the low acoustic reflectivity of blood may limit the use of
ultrasound imaging for vascular or perfusion imaging. Accordingly, while
anatomical structures may be viewed effectively using ultrasound imaging,
physiologic functions of the body, such as blood flow, are not monitored easily.
As a further limitation, the lower velocity of blood flow in certain vessels of
the body makes it difficult for ultrasound systems to detect Doppler frequency
shift signals. For example, infections (abscesses) and tumors, which are
characterized by lower velocity blood flow, may not be detected by most of
today's ultrasound systems. As a result, many ultrasound procedures are
non-diagnostic for technical reasons because the physician is not able to make a
definitive diagnosis with the information that is provided by the ultrasound
image.
ULTRASOUND CONTRAST AGENTS
While the use of contrast agents in diagnostic imaging is well established
and wide-spread in other imaging modalities, historically there has been a lack
of commercially available ultrasound contrast agents. For many years, scientists
have attempted to develop such agents by focusing primarily on methods to
encapsulate air microbubbles that reflect the sound waves generated by the
ultrasound system. The development of an effective contrast agent has been
hampered by the lack of persistence of the microbubbles, or by the challenge
that microbubbles were too fragile to pass through the lungs or too large to
pass through small blood vessels. Persistence, size and stability of
microbubbles are important characteristics given that, once injected in the
bloodstream, the contrast agent must pass through the lungs, where gas exchange
can eliminate the microbubbles before reaching the left chambers of the heart
and before circulating throughout the vascular system.
Cardiology Indications. We believe that an effective ultrasound contrast
agent could improve echocardiography by allowing physicians to use left
ventricular chamber opacification to assist in cardiac function assessment
regionally, through wall motion analysis and globally, through ejection fraction
measurements. Further, an ultrasound contrast agent, which is persistent and
able to pass through small blood vessels, could allow physicians to assess
myocardial perfusion to differentiate functioning cardiac tissue from ischemic
(blood deficient) and infarcted (dead) tissue. The use of contrast-enhanced
echocardiography in conjunction with exercise or pharmacological stress
procedures could also assist in the differentiation of ischemia from infarction.
In 1994, the FDA approved the first ultrasound contrast agent for use as an aid
to enhance images of ventricular chambers and endocardial border (inner lining
of the heart chamber) definition in patients with suboptimal echoes undergoing
certain cardiac function studies. A second agent was approved in December 1997
which replaced the first agent. Our NDA for EchoGen, as amended, is currently
under review by the FDA for approval of certain echocardiography indications. In
addition, we believe that at least three other companies ultrasound contrast
agents are being reviewed by the FDA and several others are in clinical trials
for echocardiography indications.
Radiology Indications. We believe that the development of an effective
ultrasound contrast agent could improve the capabilities of ultrasound imaging
for radiology indications, including
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diagnostic imaging of kidney, liver, prostate and peripheral vascular diseases,
by increasing the visibility of blood flow and blood flow patterns, and by
improving the detection of small lesions or structures deep within the body,
where acoustic energy is lost as the transmitted acoustical beam passes through
the body. For microvascular indications (the diagnosis of disease states and
conditions through the analysis of patterns of small vessel blood flow),
ultrasound contrast agents may allow the physician to identify lesions, tumors
or other diseases in the liver, kidneys, prostate and other tissues and organs.
In macrovascular indications (the diagnosis of disease states and conditions of
the major arteries and veins of the body), an effective ultrasound contrast
agent may aid in the detection of strokes and pre-stroke conditions through
visualization of intracranial (within the skull) blood vessels, atherosclerosis,
vascular graft patency and peripheral vascular thrombosis, a major cause of
pulmonary emboli (blood clots in the pulmonary artery and the lungs). Although
we have conducted clinical trials for radiology indications for EchoGen, our NDA
for EchoGen, as amended, does not include radiology indications. There are no
FDA approved ultrasound contrast agents for intravascular radiology indications
although we believe that at least one ultrasound contrast agent for
intravascular radiology indications is being reviewed by the FDA and that
several others are in clinical trials.
SONUS TECHNOLOGY AND PRODUCTS
ECHOGEN
We have primarily focused our research and development efforts to date on
the development of EchoGen, which is injected as small microbubbles into the
bloodstream that persist long enough to permit completion of ultrasound
diagnostic studies and which can be manufactured and packaged with an acceptable
shelf life. To develop EchoGen, initial efforts focused on identifying a
chemical agent that exhibited the desired properties of long persistence and the
ability to form small microbubbles during administration. After studying over
400 chemicals, primarily fluorocarbons, we selected dodecafluoropentane ("DDFP")
to develop as a potential ultrasound contrast agent. DDFP exists as a liquid
while stored at room temperature but changes into a gas through an activation
procedure performed just prior to administration to the patient. This process,
which we call the PhaseShift(TM) process, leads to the injection of microbubbles
into the patient's bloodstream that are small enough to pass through the lungs
and circulate in the vascular system. EchoGen is a stable, 2% emulsion of DDFP,
that through the PhaseShift process creates microbubbles, packaged in vials and
easily administered to the patient with a single peripheral venous injection
prior to or during the ultrasound study. Based on studies conducted to date, we
believe EchoGen has a useful shelf life of 18 months at room temperature.
We believe that EchoGen has the following characteristics which we believe
will provide physicians and sonographers the capability to improve ultrasound
imaging:
o Long Persistence. Based on results from clinical trials, we believe
that EchoGen is sufficiently persistent to enhance typical cardiology
and radiology studies. The period of enhancement of EchoGen varies
depending upon numerous factors. In Phase 3 studies of cardiac
function, where 2D grayscale is the preferred imaging modality,
EchoGen enhanced images for approximately three to five minutes. In
clinical studies of radiology
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indications where color Doppler is the primary imaging modality,
EchoGen enhanced images for an average of approximately fifteen
minutes.
o Limited Attenuation. Our clinical trials of EchoGen have also
demonstrated image enhancement with minimal attenuation. Attenuation
is an undesirable effect of contrast agents whereby the backscatter of
reflective soundwaves causes part or all of the image to blackout or
disappear until the concentration of microbubbles in the blood stream
dissipates.
o Single Bolus Injection. EchoGen is administered with a single bolus
injection and does not require multiple injections or infusions during
the course of an ultrasound procedure.
o Convenient Product Configuration. We intend to supply EchoGen in a
procedure kit which provides all of the materials required to
administer the product and which does not require refrigeration.
o Safety. Results from preclinical and clinical trials conducted to date
indicate that DDFP, the active ingredient of EchoGen, is substantially
excreted from the body through the lungs within 25 minutes of
administration without metabolic changes. Some patients experience
transient side effects such as feeling of warmth, taste perversion
and/or headache. In addition, EchoGen contains no human blood products
which eliminates the potential risk of anaphylactoid (allergic)
reactions or blood borne diseases.
The above product characteristics have been established through our
clinical trials. However, there can be no assurance that characteristics
inconsistent with those from our clinical trials will be encountered in future
use of the product. See "Certain Factors That May Affect Our Business and Future
Results - Unproven Safety and Efficacy; Uncertainty of Clinical Trials."
QW7437
In 1997, we initiated development of a second ultrasound contrast agent,
QW7437. Preclinical studies and Phase 1 clinical studies in Europe have
suggested that QW7437 may have improved persistence in grayscale imaging of
blood flow in tissue compared to EchoGen or other fluorocarbon-based contrast
agents. Such grayscale tissue imaging may have application in assessing
perfusion (blood flow) in the microvasculature of the myocardium (heart muscle
tissue). Imaging myocardial perfusion may help clinicians assess the area of
risk of the myocardium during coronary occlusion, the size of an infarct
following reperfusion, the presence of flow limiting narrowings in coronary
arteries, the amount of collateral blood flow, and the success of therapeutic
interventions such as coronary angioplasty. See "Certain Factors That May Affect
Our Business and Future Results - Unproven Safety and Efficacy; Uncertainty of
Clinical Trials."
DRUG DELIVERY AND QW8184
We are also investigating the development of drug delivery systems
including the application of our proprietary technology and capabilities in
emulsion formulations to improve the bioavailability and reduce the toxicity of
water insoluble compounds. QW8184 is our first project in the application of our
emulsion technology for drug delivery systems. QW8184 is a proprietary
formulation of paclitaxel, the active ingredient in Taxol(R), a widely used
oncology drug. Based on preclinical studies to date, we believe QW8184 may
enable the administration of
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paclitaxel in a bolus administration and also believe it may result in an
improved safety profile. Taxol is currently administered by infusion and
requires premedication with other drugs to minimize certain side effects.
Our strategy is to enter into feasibility study agreements with companies
who own active compounds, typically large pharmaceutical companies, to determine
if our drug delivery strategy enhances their active compound. In December 1999,
we entered into our first feasibility study agreement. Under this feasibility
study agreement, we have agreed to use our reasonable best efforts to develop
new formulations of an active compound and provide them to the pharmaceutical
company for further evaluation. If the feasibility study is successful, our goal
is to negotiate a development and license agreement with the pharmaceutical
company. However, there can be no assurance that this feasibility study or any
new feasibility studies will result in development or license agreements. See
"Certain Factors That May Affect Our Business and Future Results - Uncertainty
Associated with Drug Delivery Technology."
STRATEGIC ALLIANCES
Our strategy is to enter into strategic alliances to facilitate the
development, manufacture and distribution of our products.
ABBOTT LABORATORIES
In 1993, our company and Abbott Laboratories ("Abbott"), a worldwide
manufacturer of health care products, entered into a supply agreement relating
to EchoGen (the "Supply Agreement"). Under the Supply Agreement, Abbott agreed
to develop the manufacturing process, assist us in FDA submissions and
manufacture and sell the product to us for an initial five-year period after FDA
approval, subject to automatic renewal unless otherwise terminated by either
party with 12 months prior notice. Abbott is supplying us with most of our
product requirements for EchoGen clinical trials. We have agreed to purchase a
portion of the U.S. commercial requirements of EchoGen if FDA approval is
obtained.
In 1996, we entered into two agreements with Abbott for the marketing and
selling of our ultrasound contrast agents, including EchoGen, in: (1) the United
States (the "Abbott U.S. Agreement") and; (2) certain international territories
including Europe, Latin America, Canada, Middle East, Africa and certain
Asia/Pacific countries ("Abbott International Agreement"). In January 1999, we
amended the Abbott U.S. Agreement (the "Amended Abbott U.S. Agreement").
Under the Amended Abbott U.S. Agreement, Abbott agreed to make certain
payments to us, primarily conditioned upon the achievement of regulatory
approval and certain commercialization milestones potentially totaling $31.0
million, of which we have received $23.0 million as of December 31, 1999. In
addition, Abbott has agreed to pay us 47% of net EchoGen revenues in the U.S., a
portion of which we must use to fund our responsibilities under the Amended
Abbott U.S. Agreement. Subject to early termination, the agreement spans the
later of the life of the patents relating to EchoGen or the introduction of a
generic equivalent by a third party. Abbott can acquire the rights to certain
additional indications for EchoGen by
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making additional clinical support payments. In addition, Abbott purchased in
1996, for $4.0 million, warrants to acquire 500,000 shares of our common stock.
The warrants are exercisable over five years at $16.00 per share.
In February 2000, we entered into an amendment with Abbott that further
modifies the Amended Abbott U.S. Agreement. The modified agreement provides
Abbott the option either to market and distribute EchoGen in the U.S. subject to
our obtaining necessary regulatory approvals, or to terminate the Amended Abbott
U.S. Agreement, whether regulatory approvals are received or not. Abbott's
option terminates on March 31, 2000. No financial payments will be made during
the period of Abbott's option. If Abbott elects to market and sell EchoGen in
the U.S., the parties have agreed to negotiate an amendment by April
30, 2000 to reflect any changes in responsibilities of the parties, the status
of regulatory approval and current market conditions. If Abbott elects to
terminate the Amended Abbott U.S. Agreement by March 31, 2000, Abbott will have
no further economic or other responsibilities under the Amended Abbott U.S.
Agreement and all rights and marketing materials related to EchoGen will be
returned to us. We have also agreed with Abbott to amend the Supply Agreement
under which Abbott manufactures EchoGen for us. If the Amended Abbott U.S.
Agreement is terminated, Abbott will manufacture EchoGen for a period of two
years following FDA approval, if obtained, but in no event later than July 1,
2002, during which time Abbott will transfer EchoGen manufacturing
responsibility, processes and data to us or a third party selected by us. There
can be no assurance that Abbott will elect its option to market and distribute
EchoGen in the U.S., or even if Abbott should determine to do so, that we and
Abbott will agree on mutually acceptable revisions to the Amended Abbott U.S.
Agreement by April 30, 2000. Furthermore, there can be no assurance that in the
event of termination of the Amended Abbott U.S. Agreement, that we can
successfully market and distribute EchoGen, or that we will be successful in
obtaining other partners to market and distribute EchoGen, or that we will be
able to locate and qualify an alternative manufacturer of EchoGen.
In October 1999, our company and Abbott Laboratories International Division
("Abbott International") restructured the Abbott International Agreement. As of
the date of restructuring, Abbott International has paid $14.7 million to us
under the Abbott International Agreement. Under the restructured agreement,
Abbott International has returned all exclusive marketing rights to EchoGen to
us. We have agreed to share with Abbott International, 21% of our net profits
from the sale of EchoGen and will also share 50% of any up-front license fees
paid to us by new partners, of which 50% will be credited against the share of
net profits that we will pay to Abbott International. We have commenced
discussions with new potential marketing partners for the Abbott International
territories. No assurance can be given that we will secure new marketing
partners for the territories under the Abbott International Agreement.
Under the restructured international agreement, Abbott International also
retains a five-year option to elect to become a co-marketer of QW7437, our
second ultrasound contrast agent under development. Abbott International has
also agreed not to market or sell a competing ultrasound contrast product during
the option period, and thereafter if it elects its option to co-market QW7437.
In the event the Amended Abbott U.S. Agreement is terminated, Abbott
International's rights to a percentage of our profits or upfront license fees
and co-marketing rights to QW7437 will terminate.
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We cannot give any assurance that we will receive any additional funding or
milestone payments under the Amended Abbott U.S. Agreement. If our relationship
with Abbott were to terminate or if the form of existing agreements is modified
in a manner materially adverse to us, it could have a material adverse effect on
our business, financial condition and results of operation. See "Certain Factors
That May Affect Our Business and Future Results - Dependence on Third Parties
for Funding, Clinical Development and Distribution."
DRUG DELIVERY FEASIBILITY STUDY
We believe our drug delivery technology can be applied to the formulation
of many water insoluble active compounds which are either currently in use or
being investigated as therapeutic agents. Our strategy is to enter into
feasibility study agreements with companies who own active compounds, typically
large pharmaceutical companies, to determine if our drug delivery technology
enhances their active compound. In late 1999, we entered into our first
feasibility study agreement. Under this feasibility study agreement, we have
agreed to use our reasonable best efforts to develop new formulations of an
active compound and provide them to the pharmaceutical company for further
evaluation. If the feasibility study is successful, our goal is to negotiate a
development and license agreement with the pharmaceutical company. However,
there can be no assurance that this feasibility study or any new feasibility
studies will result in development or license agreements.
STATUS OF CLINICAL TRIALS
We use academic institutions and clinical research organizations to conduct
and monitor our clinical trials. The E.U. marketing authorization and the NDA
under review by the FDA for EchoGen is primarily based on the results of two
pivotal Phase 3 echocardiography clinical trials. These pivotal trials were
conducted from late 1995 to early 1996 at 19 sites in the U.S. to evaluate the
safety and efficacy of EchoGen in improving the use of echocardiography to
assess cardiovascular disease in patients who previously had a suboptimal
(non-diagnostic) echo exam. Based on an evaluation of EchoGen's efficacy by
independent blinded reviewers, EchoGen significantly increased the proportion of
patients with optimal echocardiograms. After the baseline exam, only 5 to 21% of
exams were optimal, compared with 47 to 90% of exams following administration of
EchoGen. Based on evaluations made by the principal investigators of the study,
EchoGen led to an increased diagnostic confidence in 76% of the patients,
disclosed findings not present at baseline in 63%, and prevented the need for
further studies in 19% of patients. These clinical trials provide the basis for
our EchoGen NDA which has been deemed approvable by the FDA subject to certain
conditions which we believe have now been addressed. However, there can be no
assurance that the EchoGen NDA will obtain final FDA approval. See "Certain
Factors That May Affect Our Business and Future Results - Unproven Safety and
Efficacy; Uncertainty of Clinical Trials."
SAFETY RESULTS OF ECHOGEN
In analyzed clinical trials with 2,230 patients and volunteers utilizing
the current formulation of EchoGen, there were no findings that we believe would
suggest a toxicologic or pharmacologic response to the administration of
EchoGen. There were no effects on organ
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function, blood chemistry, hematologic or urinalysis results. Adverse events
that were considered possibly, probably or definitely related to EchoGen
administration were experienced by 10.2% of patients. Those events occurring in
greater than 1% of patients include feeling of warmth and flushing (3.1%), taste
perversion (1.3%) and headache (1.8%). The events were usually mild, occurred
within 30 minutes of injection, generally required no treatment and left no
lasting aftereffects. See "Certain Factors That May Affect Our Business and
Future Results - Unproven Safety and Efficacy; Uncertainty of Clinical Trials."
ADDITIONAL STUDIES OF ECHOGEN
In addition to the pivotal echocardiology clinical trial, recent clinical
trials investigating the use of EchoGen in additional applications are shown
below:
Application Clinical Phase Number of Patients
- ----------- -------------- ------------------
Pharmacologic and exercise stress Phase 3 275
echocardiography
Detection of prostate cancer Phase 3 213
Three-dimensional measurement of left Phase 2 90
ventricular volume
The commercialization of EchoGen for new indications, beyond those
contained in the E.U. marketing authorization or in the NDA under review, will
require approval of separate regulatory submissions based on extensive
additional clinical testing. There can be no assurance the clinical trial
results from the above or future trials will demonstrate any efficacy or will be
adequate for regulatory approval.
None of our products have been approved by the FDA and there can be no
assurance that such approval will be obtained. See "Certain Factors That May
Affect Our Business and Future Results - Uncertainty of Governmental Regulatory
Requirements; Lengthy Approval Process; and Unproven Safety and Efficacy;
Uncertainty of Clinical Trials."
MARKETING AND DISTRIBUTION
In 1996, we entered into two agreements with Abbott for the marketing and
selling of ultrasound contrast agents, including EchoGen, in: (1) the United
States, the Abbott U.S. Agreement and; (2) the Abbott International Agreement.
In January 1999, we amended the Abbott U.S. Agreement.
In February 2000, we entered into an amendment with Abbott that further
modifies the Amended Abbott U.S. Agreement. The modified agreement provides
Abbott the option either to market and distribute EchoGen in the U.S. subject to
our obtaining necessary regulatory approvals, or to terminate the Amended Abbott
U.S. Agreement, whether regulatory approvals
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are received or not. The option expires March 31, 2000. There can be no
assurance that Abbott will elect their option to market and distribute EchoGen
in the U.S. or even if Abbott should determine to do so, that, our relationship
with Abbott will be successful. Furthermore, there can be no assurance that in
the event of termination of the Amended Abbott U.S. Agreement, that we can
successfully market and distribute EchoGen or that we will be successful in
obtaining other partners to market and distribute EchoGen. See "Certain Factors
That May Affect Our Business and Future Results - Dependence on Third Parties
for Funding, Clinical Development and Distribution."
In October 1999, our company and Abbott International restructured the
Abbott International Agreement. Under the restructured agreement Abbott
International has returned all exclusive marketing rights to EchoGen to us. In
the event the Amended Abbott U.S. Agreement is terminated, Abbott
International's rights to a percentage of our profits or upfront license fees
and co-marketing rights to QW7437 will terminate. We are currently in
discussions with potential partners for the distribution and marketing of
EchoGen in certain countries of the E.U. No assurance can be given that we will
secure new marketing partners for the territories under the Abbott International
Agreement. See "Strategic Alliances." See "Certain Factors That May Affect Our
Business and Future Results - Dependence on Third Parties for Funding, Clinical
Development and Distribution."
MANUFACTURING
We have used three outside FDA-certified organizations to manufacture
EchoGen under current Good Manufacturing Practices ("GMP") requirements for our
use in preclinical and clinical studies and have also used one of these
organizations to produce QW7437. We produce non-GMP batches of EchoGen at our
facilities as part of the ongoing development of the product.
We have entered into an agreement with Abbott pursuant to which Abbott has
agreed to scale-up, manufacture and sell EchoGen to us, packaged in final dosage
form for a period of five years from the date of FDA approval, subject to
automatic renewal unless otherwise terminated by either party with 12 months
prior notice. Abbott has produced EchoGen in commercial-scale lots for use by us
in our clinical trials. EchoGen is manufactured from raw materials supplied to
Abbott by us. Under the agreement, we must purchase certain of our requirements
of EchoGen, and we have retained the right to manufacture or to have a third
party manufacture a portion of our requirements. In addition, Abbott has agreed
to supply a kit into which EchoGen will be packaged along with other items used
in the administration of the product. We have also agreed with Abbott to amend
the Supply Agreement under which Abbott manufactures EchoGen for us. If the
Amended Abbott U.S. Agreement is terminated, Abbott will manufacture EchoGen for
a period of two years following FDA approval, if obtained, but in no event later
than July 1, 2002, during which time Abbott will transfer EchoGen manufacturing
responsibility, processes and data to us or a third party selected by us. The
inability of Abbott or any alternative contract manufacturer to manufacture and
supply us with EchoGen or the kit would have a material adverse effect on our
business, financial condition and results of operations. See "Strategic
Alliances" and "Certain Factors That May Affect Our Business and Future
Results."
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The active chemical ingredients in EchoGen, DDFP and PEG Telomer B (a
surfactant) are manufactured by a limited number of vendors. In 1998, we entered
into a commercial supply agreement for one of these raw materials. In the event
that EchoGen is approved by the FDA, we are obligated to purchase certain
minimum quantities of the material over a five-year period. The inability of
this or any other vendors to supply raw materials to us could delay the
manufacture of, or cause us to cease the manufacturing of, EchoGen. Any such
delay or cessation could have a material adverse effect on our business,
financial condition and results of operations. We believe the other raw
materials of EchoGen are readily available from various suppliers.
RESEARCH AND DEVELOPMENT
We currently conduct research and development activities at our facilities.
We also engage in certain research, preclinical studies and clinical development
efforts at universities and other institutions. Our primary research and
development efforts to date have been directed at the development and
application, including clinical trials, of EchoGen, QW7437 and QW8184. In
addition, we are conducting research in other applications of our proprietary
technology in the areas of intravascular and oral drug delivery.
We incurred expenses of approximately $5.6 million, $10.5 million and $11.6
million on research and development in fiscal 1999, 1998 and 1997, respectively.
GOVERNMENT REGULATION - DRUG APPROVAL PROCESS
Regulation by governmental authorities in the U.S. and other countries is a
significant factor in the production and marketing of our products and in our
ongoing research and development activities. In order to undertake clinical
tests, to produce and to market products for human diagnostic or therapeutic
use, mandatory procedures and safety standards established by the FDA and
comparable agencies in foreign countries must be followed.
The standard process required by the FDA before a pharmaceutical agent may
be marketed in the U.S. includes the following steps:
(i) preclinical studies including laboratory evaluation and animal
studies;
(ii) submission to the FDA of an Investigational New Drug Application
("IND"), which must become effective before human clinical trials may
commence;
(iii) adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug in its intended application;
(iv) submission to the FDA of an NDA with respect to the drug, which
application is not automatically accepted by the FDA for
consideration; and
(v) FDA approval of the NDA prior to any commercial sale or shipment of
the drug.
In addition to obtaining FDA approval for each product, each domestic
drug-manufacturing establishment must be registered or licensed by the FDA.
Domestic manufacturing establishments are subject to inspections by the FDA and
by other Federal, state and local agencies and must comply with Good
Manufacturing Practices ("GMP") requirements applicable to the production of
pharmaceutical agents.
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Preclinical studies include laboratory evaluation of product chemistry and
animal studies to assess the potential safety and efficacy of the product and
its formulation. The results of the preclinical studies are submitted to the FDA
as part of an IND, and unless the FDA objects, the IND will become effective 30
days following its receipt by the FDA.
Clinical trials involve the administration of the drug to healthy
volunteers or to patients under the supervision of a qualified principal
investigator. Clinical trials are conducted in accordance with protocols that
detail the objectives of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. Each protocol is submitted to the FDA
as part of the IND. Each clinical study is approved and monitored by an
independent Institutional Review Board ("IRB"). The IRB will consider, among
other things, ethical factors, informed consents, the safety of human subjects
and the possible liability of the institution conducting a clinical study.
Clinical trials typically are conducted in three sequential phases,
although the phases may overlap. In Phase 1, the initial introduction of the
drug to humans or the first studies involving new routes of administration or
unusual conditions, such as stress echocardiography, the drug is tested for
safety, dosage tolerance, metabolism, distribution, excretion and clinical
pharmacology in healthy adult subjects. Phase 2 involves detailed evaluation of
safety and efficacy of the drug in a range of doses in patients with the disease
or condition being studied. Phase 3 trials consist of larger scale evaluation of
safety and efficacy and may require greater patient numbers, depending on the
clinical indications for which marketing approval is sought.
The process of completing clinical testing and obtaining FDA approval for a
new product is likely to take a number of years and require the expenditure of
substantial resources. The FDA may grant an unconditional approval of a drug for
a particular indication or may grant approval conditioned on further
post-marketing testing. The FDA also may conclude that the submission is not
adequate to support an approval and may require further clinical and preclinical
testing, re-submission of the NDA, and further time-consuming review. Even after
initial FDA approval has been obtained, further studies may be required to
provide additional data on safety or to gain approval for the use of a product
as a treatment for clinical indications other than those for which the product
was approved initially. Also, the FDA may require post-marketing testing and
surveillance programs to monitor the drug's efficacy and side effects. Results
of these post-marketing programs may prevent or limit the further marketing of
the drug.
The following details certain events in the FDA approval process for the
EchoGen NDA to date:
o In 1996, we submitted an NDA for EchoGen to the FDA based on the data
from the Phase 3 clinical trials for cardiology and radiology
indications. The FDA accepted the NDA as filed in September 1996;
o In 1997, the FDA informed us that a Medical Imaging Drug Advisory
Committee meeting was not necessary to complete the review of the NDA
for EchoGen;
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o In February 1998, we received an action letter from the FDA which
indicated that the review of the EchoGen NDA was completed and the
application was considered inadequate for approval, citing certain
deficiencies in the application;
o In August 1998, we submitted an amendment to the FDA in response to
the February 1998 FDA letter and, in October 1998, we were notified by
the FDA that the amendment filing was considered complete;
o In April 1999, we received an "approvable letter" from the FDA for
EchoGen. The FDA letter provided the conditions that must be satisfied
before final approval.
o In September 1999, we submitted a formal response to the conditions of
the approvable letter. The FDA has notified us that it expects to
complete its review on our response by March 2000. Although it is
inappropriate for us to speculate on the outcome of the FDA review, we
believe we have addressed the conditions set forth in the approvable
letter.
No assurance can be given that the FDA will review the response to the
approvable letter in a timely manner or that the FDA will ultimately approve the
NDA. See "Certain Factors That May Affect Our Business and Future Results -
Uncertainty of Governmental Regulatory Requirements; Lengthy Approval Process."
Sales of pharmaceutical products outside of the U.S. are subject to
regulatory requirements that vary widely from country to country. In the E.U.,
the general trend has been towards coordination of common standards for clinical
testing of new drugs, leading to changes in various requirements imposed by each
E.U. country.
In 1996, we submitted a MAA to the EMEA for EchoGen under the new
centralized application procedures whereby a generally binding approval is
obtained by a single application, valid for all 15 nations of the E.U.,
including the U.K., Ireland, France, Germany, Italy, Spain, Portugal, Sweden,
Finland, Denmark, Belgium, Luxembourg, the Netherlands, Greece and Austria.
The following details certain events in the EMEA approval process for our
EchoGen MAA to date:
o In March 1998, the EMEA's CPMP issued a positive opinion on EchoGen
for use as a transpulmonary echocardiographic contrast agent in
patients with suspected or established cardiovascular disease who have
had previous inconclusive non-contrast studies;
o In July 1998, the EMEA ratified the CPMP recommendation and granted a
marketing authorization for EchoGen in the 15 countries of the E.U.;
o During 1998 and 1999, we submitted to the EMEA certain variations of
our marketing authorization to bring the manufacturing process and
specifications for European product in line with the process and
specifications submitted to the FDA for approval in the U.S.
o In 1999, we received notifications that the variations to our
marketing license were approved by the EMEA with the final
notification received in December 1999.
See "Certain Factors That May Affect Our Business and Future Results - Ability
to Attract and Retain New Partnerships"
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The level of regulation in other foreign jurisdictions varies widely. The
time required to obtain regulatory approval from comparable regulatory agencies
in each foreign country may be longer or shorter than that required for FDA or
EMEA approval. In addition, in certain foreign markets, we may be subject to
governmentally mandated prices for EchoGen. We are and may be subject to
regulation under state and Federal law regarding occupational safety, laboratory
practices, handling of chemicals, environmental protection and hazardous
substance control. We also will be subject to other present and possible future
local, state, federal and foreign regulations.
COMPETITION
The health care industry is characterized by extensive research efforts and
rapid technological change. Competition in the development of ultrasound
contrast agents is intense and expected to increase. Although there is currently
only one FDA approved ultrasound contrast agent being marketed in the U.S. for
certain cardiology applications, there are, to our knowledge, four other
ultrasound contrast agents, including EchoGen, that have been submitted to the
FDA for approval and we believe that other medical and pharmaceutical companies
are conducting clinical trials with ultrasound contrast agents. In addition,
there are three ultrasound contrast agents, including EchoGen, approved for
marketing in certain countries in Europe for certain cardiology and/or radiology
indications and we believe that other ultrasound contrast agents are under
European regulatory review. We also believe that other medical and
pharmaceutical companies will compete with us in areas of research and
development, acquisition of products and technology licenses, and the
manufacturing and marketing of ultrasound contrast agents. We expect that
competition in the ultrasound contrast agent field will be based primarily on
efficacy, safety, ease of administration, breadth of approved indications and
physician, healthcare payor and patient acceptance. Although we believe that if
EchoGen is approved for commercial sale in the U.S., EchoGen will be
well-positioned to compete successfully, there can be no assurance that we will
be able to do so. Many of our competitors and potential competitors have
substantially greater financial, technical and human resources than us and have
substantially greater experience in developing products, obtaining regulatory
approvals and marketing and manufacturing medical products. Accordingly, these
competitors may succeed in obtaining FDA or foreign jurisdictional approval for
their products more rapidly than us. Generally, products that reach the market
first have a market advantage. In addition, other technologies or products such
as advancements in ultrasound equipment may be developed that have an entirely
different approach or means of accomplishing the enhancement of ultrasound
imaging or other imaging modalities that would render our technology and
products noncompetitive or obsolete. See "Certain Factors That May Affect Our
Business and Future Results - Competition and Rick of Technological
Obsolescence."
PATENTS AND PROPRIETARY RIGHTS
We consider the protection of our technology to be important to our
business. In addition to seeking U.S. patent protection for many of our
inventions, we are seeking patent protection in certain foreign countries in
order to protect our proprietary rights to inventions. We also rely
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upon trade secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain our competitive position.
Our success will depend, in part, on our ability to obtain patents, defend
patents and protect trade secrets. We have filed patent applications in the U.S.
and in over 40 foreign countries relating to our principal technologies. In the
U.S., 12 patents have been issued to us, the claims of which are primarily
directed to ultrasound contrast media that include fluorine-containing chemicals
(such as EchoGen) as well as methods of making and using these media. The patent
position of medical and pharmaceutical companies is highly uncertain and
involves complex legal and factual questions. There can be no assurance that any
claims which are included in pending or future patent applications will be
issued, that any issued patents will provide us with competitive advantages or
will not be challenged by third parties, or that the existing or future patents
of third parties will not have an adverse effect on our ability to commercialize
our products. Furthermore, there can be no assurance that other companies will
not independently develop similar products, duplicate any of our products or
design around patents that may be issued to us. Litigation may be necessary to
enforce any patents issued to us or to determine the scope and validity of
others' proprietary rights in court or administrative proceedings. Any
litigation or administrative proceeding could result in substantial costs to us
and distraction of our management. An adverse ruling in any litigation or
administrative proceeding could have a material adverse effect on our business,
financial condition and results of operations. We have been involved in
administrative proceedings and have initiated a patent infringement suit against
one of our competitors. See "Legal Proceedings" and "Certain Factors That May
Affect Our Business and Future Results - Dependence on Patents and Proprietary
Rights."
Our commercial success will depend in part on not infringing patents issued
to competitors. There can be no assurance that patents belonging to competitors
or others will not require us to alter our products or processes, pay licensing
fees or cease development of our current or future products. Any litigation
regarding infringement could result in substantial costs to us and distraction
of our management, and any adverse ruling in any litigation could have a
material adverse effect on our business, financial condition and results of
operations. Further, there can be no assurance that we will be able to license
other technology that we may require at a reasonable cost or at all. Failure by
us to obtain a license to any technology that we may require to commercialize
our products would have a material adverse effect on our business, financial
condition and results of operations. In addition, to determine the priority of
inventions and the ultimate ownership of patents, we may participate in
interference, reissue or re-examination proceedings conducted by the U.S. Patent
and Trademark Office ("PTO") or in proceedings before foreign agencies with
respect to any of our existing patents or patent applications or any future
patents or applications, any of which could result in loss of ownership of
existing, issued patents, substantial costs to us and distraction of our
management. Two of our 12 U.S. patents, U.S. 5,573,751 (`751) and U.S. 5,558,094
(`094), have been re-examined by the PTO in four separate proceedings. In 1998,
we announced we received decisions from the PTO indicating the patentability of
claims in all four re-examination proceedings. The PTO has determined that a
number of the claims included in the original `094 and `751 patents as well as
some claims that were amended will be confirmed. Certain claims, which included
reference to fluorinated chemicals other than perfluoropropane, perfluorobutane
and perfluoropentane, were cancelled during the re-examination process. See
"Legal Proceedings."
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In August 1999, we entered into an agreement with Nycomed Imaging AS
("Nycomed") for the cross-license of certain proprietary ultrasound contrast
agent technologies. Under the terms of the agreement, we provided Nycomed with
an exclusive license to our ultrasound contrast patents except as related to
perfluoropentane, the gas used in our ultrasound contrast products. Under the
exclusive license to the patents, Nycomed also has the right to freely
sublicense to other companies with a portion of any sublicense fees to be paid
to us. In addition, we have a worldwide, non-exclusive license to certain of
Nycomed's ultrasound contrast agent patents. We also have the right to
sublicense these patents to our collaborative partners. Under the agreement,
Nycomed has paid us a license fee of $10.0 million. In addition, both companies
have agreed to pay royalties to each other based on future sales of our
respective ultrasound contrast agents.
Also, under the agreement, we transferred to Nycomed the responsibilities
and legal costs associated with our patent infringement litigation with
Molecular Biosystems and Mallinckrodt Medical Inc. ("Mallinckrodt"). See "Legal
Proceedings."
We have obtained registered trademarks for our corporate name and for
EchoGen in the U.S. and certain foreign countries. There can be no assurance
that the registered or unregistered trademarks or trade names of our company
will not infringe upon third party rights or will be acceptable to regulatory
agencies such as the FDA. The requirement to change our trademarks or trade name
could entail significant expenses and could have a material adverse effect on
our business, financial condition and results of operations.
We also rely on unpatented trade secrets, proprietary know-how and
continuing technological innovation which we seek to protect, in part, by
confidentiality agreements with our corporate partners, collaborators, employees
and consultants. There can be no assurance that these agreements will not be
breached, that we will have adequate remedies for any breach, or that our trade
secrets or know-how will not otherwise become known or be independently
discovered by competitors. Further, there can be no assurance that we will be
able to protect our trade secrets or that others will not independently develop
substantially equivalent proprietary information and techniques. See "Certain
Factors That May Affect Our Business and Future Results - Dependence on Patents
and Proprietary Rights."
PRODUCT LIABILITY
The clinical testing, manufacturing and marketing of our products may
expose us to product liability claims. We maintain liability insurance for
possible claims arising from the use of our products in clinical trials with
limits of $5.0 million per claim and in the aggregate. Although we have never
been subject to a product liability claim, there can be no assurance that the
coverage limits of our insurance policies will be adequate or that one or more
successful claims brought against us would not have a material adverse effect
upon our business, financial condition and results of operations. Further, if
EchoGen is approved by the FDA, there can be no assurance that adequate product
liability insurance will be available, or if available, that it will be
available at a reasonable cost. Any adverse outcome resulting from a product
liability claim could have a material adverse effect on our business, financial
condition and results of operations.
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HUMAN RESOURCES
As of February 1, 2000, we had 43 employees, 31 engaged in research and
development, regulatory, clinical and manufacturing activities, and 12 in
marketing and administration. We consider our relations with our employees to be
good, and none of our employees is a party to a collective bargaining agreement.
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CERTAIN FACTORS THAT MAY AFFECT OUR BUSINESS AND FUTURE RESULTS
FORWARD-LOOKING STATEMENTS. THIS ANNUAL REPORT ON FORM 10-K CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, AND THE COMPANY INTENDS THAT SUCH FORWARD-LOOKING
STATEMENTS BE SUBJECT TO THE SAFE HARBORS CREATED THEREBY. EXAMPLES OF THESE
FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO:
o THE SUBMISSION OF APPLICATIONS FOR AND THE TIMING OR LIKELIHOOD OF
MARKETING APPROVALS FOR ONE OR MORE INDICATIONS;
o MARKET ACCEPTANCE OF OUR PRODUCTS;
o OUR ANTICIPATED FUTURE CAPITAL REQUIREMENTS AND THE TERMS OF ANY
CAPITAL FINANCING;
o THE DECISION OF ABBOTT TO MARKET OUR PRODUCTS IN THE U.S., OUR ABILITY
TO LOCATE AND ENTER INTO AGREEMENTS WITH DISTRIBUTORS FOR
INTERNATIONAL TERRITORIES, OR WITH OTHER PARTIES IN THE U.S., IF
ABBOTT SHOULD DETERMINE NOT TO MARKET OUR PRODUCTS IN THE U.S.;
o OUR ABILITY TO IDENTIFY AND ENTER INTO ACCEPTABLE ARRANGEMENTS WITH
ALTERNATIVE SOURCES OF SUPPLY OF ECHOGEN SHOULD ABBOTT DETERMINE NOT
TO CONTINUE TO MANUFACTURE ECHOGEN;
o THE PROGRESS AND RESULTS OF CLINICAL TRIALS;
o THE TIMING AND AMOUNT OF FUTURE MILESTONE PAYMENTS, PRODUCT REVENUES
AND EXPENSES; AND
o THE ANTICIPATED OUTCOME OR FINANCIAL IMPACT OF LEGAL MATTERS.
WHILE THESE STATEMENTS MADE BY US ARE BASED ON MANAGEMENT'S CURRENT BELIEFS AND
JUDGMENT, THEY ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO VARY. IN EVALUATING SUCH STATEMENTS, STOCKHOLDERS AND INVESTORS
SHOULD SPECIFICALLY CONSIDER A NUMBER OF FACTORS AND ASSUMPTIONS, INCLUDING
THOSE DISCUSSED IN THE TEXT AND THE FINANCIAL STATEMENTS AND THEIR ACCOMPANYING
FOOTNOTES IN THIS REPORT AND THE RISK FACTORS SET FORTH BELOW AND AS DETAILED
FROM TIME TO TIME IN OUR FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF THE FOLLOWING FACTORS, AMONG OTHERS.
Uncertainty of Governmental Regulatory Requirements; Lengthy Approval
Process. We are subject to uncertain governmental regulatory requirements and a
lengthy approval process for our products prior to any commercial sales of our
products. The development and commercial use of our products is regulated by the
FDA, EMEA and comparable foreign regulatory agencies. The
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regulatory approval process for new ultrasound contrast agents, including
required preclinical studies and clinical trials, is lengthy and expensive.
In 1998, we received an action letter from the FDA which indicated that the
review of the EchoGen NDA was completed and the application was considered
inadequate for approval, citing certain deficiencies in the application. In
August 1998, we submitted an amendment to the FDA in response to the February
1998 FDA action letter. In April 1999, we received an "approvable letter" from
the FDA for EchoGen. The approvable letter provided the conditions that must be
satisfied before final approval. In September 1999, we submitted a formal
response to the conditions set forth in the approvable letter. The FDA has
notified us that it expects to complete its review of our response by March
2000. Although it is inappropriate for us to speculate on the outcome of the FDA
review, we believe we have addressed the conditions set forth in the approvable
letter. No assurance can be given that the FDA will review the response to the
approvable letter in a timely manner or that the FDA will ultimately approve the
NDA.
Our company, and any collaborative partners may encounter significant
delays or excessive costs in our efforts to secure necessary approvals. There
can be no assurance that the necessary FDA and other regulatory approvals will
be obtained in a timely manner, if at all. We cannot predict if or when any of
our products under development will be commercialized.
Future U.S. or foreign legislative or administrative actions also could
prevent or delay regulatory approval of our products. Even if regulatory
approvals are obtained, they may include significant limitations on the
indicated uses for which a product may be marketed. A marketed product also is
subject to continual FDA, EMEA and other regulatory agency review and
regulation. Later discovery of previously unknown problems or failure to comply
with the applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market, as well as
possible civil or criminal sanctions. In addition, if marketing approval is
obtained, the FDA, EMEA or other regulatory agency may require post-marketing
testing and surveillance programs to monitor the drug's efficacy and side
effects. Results of these post-marketing programs may prevent or limit the
further marketing of the monitored drug. See "Government Regulations."
Unproven Safety and Efficacy; Uncertainty of Clinical Trials. We currently
have only two products, EchoGen and QW7437, that have been investigated in human
clinical trials. Although EchoGen has received EMEA approval for marketing in
Europe, our application for approval for marketing in the U.S. is currently
under review by the FDA. There can be no assurance that the FDA will not require
additional clinical trials, or that such trials if begun, will demonstrate any
efficacy or will be completed successfully in a timely manner, if at all. See
"Status of Clinical Trials" and "Government Regulations." In addition, EMEA
approval and the amended FDA filing for approval of EchoGen only relate to
certain cardiology applications. We believe EchoGen may be used in other
applications, such as liver, kidney, peripheral vascular, prostate and stress
echocardiography exams. Also, we have investigated EchoGen and QW7437 in limited
clinical trials for application in assessing myocardial perfusion. Each of those
applications will require specific clinical studies to support submissions to
regulatory authorities for expanded labeling in those applications which will be
lengthy and expensive. Failure to complete successfully any of our clinical
trials on a timely basis or at all may have a material
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adverse effect on our business, financial condition and results of operations.
In clinical trials to date, adverse events related to the final formulation of
EchoGen have been infrequent, generally mild and transient, and have included
feelings of warmth, taste perversion and/or headache. There can be no assurance
that more serious side effects will not be encountered in future trials.
History of Operating Losses; Uncertainty of Future Financial Results. Our
future financial results are uncertain. Although we reported net income of $0.4
million, $1.0 million and $1.7 million for the years ended December 31, 1999,
1997 and 1996, respectively, we reported a net loss of $11.2 million in 1998 and
have experienced significant accumulated losses since our inception in 1991, and
are expected to incur net losses in the foreseeable future. These losses have
resulted primarily from expenses associated with our research and development
activities, including preclinical and clinical trials, and general and
administrative expenses. We anticipate that our operating expenses will increase
significantly in the future as we prepare for the anticipated commercialization
of EchoGen, if U.S. regulatory approval is obtained, and as we increase our
research and development expenditures on new products. However, there can be no
assurance that we will obtain the regulatory approvals necessary to
generate product revenues. If we are unable to generate significant product
revenues, we may incur substantial losses. Moreover, even if we generate
significant product revenues, there can be no assurance that we will be able to
sustain profitability. Our results of operations have varied and will continue
to vary significantly and depend on, among other factors:
o the timing of fees and milestone payments, if any, made under the
Amended Abbott U.S. Agreement;
o the entering into of new product license agreements;
o the timing and costs of clinical trials; and
o costs related to obtaining, defending and enforcing patents.
Future Capital Requirements and Uncertainty of Additional Funding. Our
development efforts to date have consumed substantial amounts of cash and we
have generated only limited revenues from payments received from our contractual
agreements. There can be no assurance that we will continue to receive such
payments in the future. We expect that our cash requirements will increase
significantly in the future, and there can be no assurance that such cash
requirements will be met on satisfactory terms, if at all. Our future capital
requirements depend on many factors including:
o our ability to obtain and retain continued funding from third parties
under contractual agreements;
o the ability to maintain our bank line of credit;
o the time and costs required to gain regulatory approvals;
o our progress on research and development programs and clinical trials;
o the costs of filing, prosecuting and enforcing patents, patent
applications, patent claims and trademarks;
o the costs of marketing and distribution;
o the status of competing products;
o the market acceptance and third-party reimbursement of our products,
if approved; and
o the cost of defending, and any damages or settlement payments that may
be paid pursuant
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to legal proceedings.
There can be no assurance that additional regulatory approvals will be
achieved or achieved in the near-term or that, in any event, additional
financing will be available on acceptable terms, if at all. Any equity financing
would likely result in substantial dilution to existing stockholders. If we are
unable to raise additional financing, we would be required to curtail or delay
the development of our products and new product research and development.
Dependence on Third Parties for Funding, Clinical Development and
Distribution. We are dependent on Abbott and other third parties for funding and
performance of a variety of activities including research, clinical development,
manufacturing, marketing and distributing our products. We have entered into
agreements with Abbott for the manufacturing, marketing and distribution of
EchoGen in the U.S. There can be no assurance that the collaboration will
continue or be successful. In February 2000, we entered into an amendment with
Abbott that further modifies the Amended Abbott U.S. Agreement. The modified
agreement provides Abbott the option either to market and distribute EchoGen in
the United States subject to obtaining necessary regulatory approvals, or to
terminate the Amended Abbott U.S. Agreement, whether regulatory approvals are
received or not. Abbott's option terminates on March 31, 2000. If Abbott elects
to market and sell EchoGen in the United States, the parties have agreed to
negotiate a revision to the Amended Abbott U.S. Agreement by April 30, 2000 to
reflect any changes in responsibilities of the parties, the status of regulatory
approval and current market conditions. There can be no assurance that Abbott
will elect its option to market and distribute EchoGen in the U.S., or even if
Abbott should determine to do so, that we and Abbott will agree on mutually
acceptable revisions to the Amended Abbott U.S. Agreement by April 30, 2000. If
the Amended Abbott U.S. Agreement is terminated, Abbott will continue to
manufacture EchoGen following FDA approval for a period of two years, but in no
event later than July 1, 2002 under the Supply Agreement with Abbott. There can
be no assurance that in the event of termination of the Amended Abbott U.S.
Agreement that we can successfully market and distribute EchoGen, or that we
will be successful in obtaining other partners to market and distribute EchoGen.
If these arrangements with third parties, including Abbott, are terminated or
the collaborations are not successful, we will not receive scheduled milestone
and funding payments and will be required to identify alternative partners for
research, clinical development, manufacturing and/or marketing and distribution,
which could have a material adverse effect on our business, financial condition
and results of operations. See "Strategic Alliances."
Competition and Risk of Technological Obsolescence. The health care
industry is characterized by extensive research efforts and rapid technological
change. Competition in the development of ultrasound contrast agents is intense
and expected to increase. Although there is currently only one FDA approved
ultrasound contrast agent being marketed in the U.S. for certain cardiology
applications, there are to our knowledge, three other ultrasound contrast agents
that have been submitted by other companies to the FDA for approval and we
believe that other medical and pharmaceutical companies are in clinical trials
with ultrasound contrast agents. We also believe that other medical and
pharmaceutical companies will compete with us in the areas of research and
development, acquisition of products and technology licenses, and the
manufacturing and marketing of ultrasound contrast agents. We expect that
competition in the ultrasound contrast agent field will be based primarily on
efficacy, safety, ease of administration,
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breadth of approved indications and physician, healthcare payor and patient
acceptance. Although we believe that if EchoGen is approved for commercial sale,
EchoGen will be well-positioned to compete successfully, there can be no
assurance that we will be able to do so. Many of our competitors and potential
competitors have substantially greater financial, technical and human resources
than we do and have substantially greater experience in developing products,
obtaining regulatory approvals and marketing and manufacturing medical products.
Accordingly, these competitors may succeed in obtaining FDA approval for their
products more rapidly than us. In addition, other technologies or products such
as advancements in ultrasound equipment may be developed that have an entirely
different approach or means of accomplishing the enhancement of ultrasound
imaging or other imaging modalities that would render our technology and
products noncompetitive or obsolete.
Limited Manufacturing Experience; Dependence on Limited Contract
Manufacturers and Suppliers. We currently rely primarily on Abbott to produce
EchoGen for research and development and clinical trials. Abbott's manufacturing
site is subject to routine FDA and other regulatory inspections of its
manufacturing practices. In addition, there are a limited number of contract
manufacturers that operate under GMP regulations, as required by the FDA. Unless
we develop an in-house manufacturing capability or we are able to identify and
qualify alternative contract manufacturers, we will be entirely dependent on
Abbott for the manufacture of EchoGen. There can be no assurance that our
reliance on Abbott for the manufacture of our products will not result in
interruptions, delays or stoppages in the supply of EchoGen, or, if Abbott
elects its option to terminate the Amended Abbott U.S. Agreement, that we will
be able to identify and qualify alternative manufacturers. The active chemical
ingredients in EchoGen, DDFP and PEG Telomer B (a surfactant) are manufactured
by a limited number of vendors. The inability of these vendors to supply
medical-grade materials to us could delay the manufacture of, or cause us to
cease the manufacturing of, EchoGen. Any such delay or cessation could have a
material adverse effect on our business, financial condition and results of
operations. See "Manufacturing" and "Strategic Alliances."
Lack of Marketing and Sales Experience. We currently have no sales,
marketing or distribution capability. In order to commercialize any products, we
must internally develop sales, marketing and distribution capabilities or make
arrangements with a third party to perform these services. In 1996, we entered
into an agreement with Abbott to market and distribute EchoGen in the U.S. In
February 2000, we entered into an amendment that provides Abbott the option to
amend or terminate this agreement by March 31, 2000. There can be no assurance
that Abbott will elect to market our products and that, even if they do elect to
market our products, they will be successful in marketing our products. In the
event that Abbott terminates our Amended Abbott U.S. Agreement, we would be
required to market our products directly and develop a marketing and sales force
with technical expertise and with supporting distribution capabilities or
contract with third parties to provide such services. We may not be able to
establish in-house sales and distribution capabilities or find alternative
marketing and distribution partners or relationships with third parties. Any
such failure to establish our own marketing capabilities or relationships with
third parties could have a material adverse effect on our business, financial
condition and results of operations. See "Manufacturing" and "Strategic
Alliances."
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In the E.U., our strategy is to market EchoGen through new marketing and
distribution agreements and we are currently in discussions with potential
partners for the distribution and marketing of EchoGen in certain countries of
the E.U. There can be no assurance that we will be successful in securing new
marketing or distribution partners for territories outside the U.S. or if
secured, these relationships will be successful. Any such failure to establish
our own marketing capabilities or relationships with third parties could have a
material adverse effect on our business, financial condition and results of
operations. See "Strategic Alliances."
Uncertainty of Market Acceptance. Currently there is only one FDA approved
ultrasound contrast agent being marketed in the U.S. and the general market
acceptance of contrast agents for ultrasound imaging has not been rapid. If
ultrasound contrast agents continue to fail to gain significant market
acceptance it could make the market acceptance of EchoGen more difficult. Market
acceptance of EchoGen may depend upon a number of factors, including efficacy,
safety, price and ease of administration. In addition, market acceptance may
depend upon our ability to educate the medical community on the diagnostic and
clinical utility and cost-effectiveness of ultrasound contrast agents in general
and EchoGen in particular and the ability to obtain reimbursement from third
party payors. There can be no assurance that EchoGen, if successfully developed
and commercialized, will gain market acceptance. Failure of EchoGen to gain
market acceptance could have a material adverse effect on our business,
financial condition and results of operations.
Dependence on Patents and Proprietary Rights. Our success will depend, in
part, on our ability to obtain patents, defend patents and protect trade
secrets. We have filed patent applications in the U.S. and in over 40 foreign
countries relating to our principal technologies. In the U.S., 12 patents have
been issued to us, the claims of which are primarily directed to ultrasound
contrast media which include fluorine-containing chemicals (such as EchoGen) as
well as methods of making and using these media. The patent position of medical
and pharmaceutical companies is highly uncertain and involves complex legal and
factual questions. There can be no assurance that any claims which are included
in pending or future patent applications will be issued, that any issued patents
will provide us with competitive advantages or will not be challenged by third
parties, or that the existing or future patents of third parties will not have
an adverse effect on our ability to commercialize its products. Furthermore,
there can be no assurance that other companies will not independently develop
similar products, duplicate any of our products or design around patents that
may be issued to us. Litigation may be necessary to enforce any patents issued
to us or to determine the scope and validity of others' proprietary rights in
court or administrative proceedings. Any litigation or administrative proceeding
could result in substantial costs to us and distraction of our management. An
adverse ruling in any litigation or administrative proceeding could have a
material adverse effect on our business, financial condition and results of
operations.
Our commercial success will depend in part on not infringing patents issued
to competitors. There can be no assurance that patents belonging to competitors
will not require us to alter our products or processes, pay licensing fees or
cease development of our current or future products. Any litigation regarding
infringement could result in substantial costs to us and distraction of our
management, and any adverse ruling in any litigation could have a material
adverse effect on our business, financial condition and results of operations.
Further, there can be no assurance that we
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will be able to license other technology that we may require at a reasonable
cost or at all. Failure by us to obtain a license to any technology that we may
require to commercialize our products would have a material adverse effect on
our business, financial condition and results of operations. In addition, to
determine the priority of inventions and the ultimate ownership of patents, we
may participate in interference, reissue or re-examination proceedings conducted
by the PTO or in proceedings before foreign agencies with respect to any of our
existing patents or patent applications or any future patents or applications,
any of which could result in loss of ownership of existing, issued patents,
substantial costs to us and distraction of our management. Two of our 12 U.S.
patents, U.S. 5,573,751 (`751) and U.S. 5,558,094 (`094) have been re-examined
by the PTO in four separate proceedings. In 1998, the Company announced it
received decisions from the PTO indicating the patentability of claims in all
four re-examination proceedings. The PTO has determined that a number of the
claims included in the original `094 and `751 patents as well as some claims
that were amended will be confirmed. Certain claims, which included reference to
fluorinated chemicals other than perfluoropropane, perfluorobutane and
perfluoropentane, were cancelled during the re-examination process. See "Legal
Proceedings."
Limitations on Third-Party Reimbursement. Our ability to successfully
commercialize EchoGen will depend in part upon the extent to which reimbursement
of the cost of EchoGen and related treatments will be available from domestic
and foreign health administration authorities, private health insurers and other
payor organizations. Third party payors are increasingly challenging the price
of medical products and services or restricting the use of certain procedures in
an attempt to limit costs. Further, significant uncertainty exists as to the
reimbursement status of newly approved health care products, and there can be no
assurance that adequate third party coverage will be available. In certain
foreign markets, we may be subject to governmentally mandated prices for
EchoGen. If adequate reimbursement is not provided by governments and third
party payors for our potential products or if adverse pricing is mandated by
foreign governments this could have a material adverse affect on our business,
financial condition and results of operations.
Uncertainty Associated with Drug Delivery Technology. Our drug delivery
technology is a new approach to the formulation of water insoluble compounds for
therapeutic applications. To date, we have performed substantial preclinical
testing on only one of our drug delivery projects, QW8184. While results from
this preclinical testing have been encouraging, preclinical results may not be
predictive of results that will be obtained from clinical trials of QW8184 or
from formulations we may develop with other active compounds. Furthermore, there
can be no assurance that the results of any clinical trials of products
developed with our drug delivery technology will demonstrate the safety and
efficacy necessary to obtain regulatory approvals to market such products.
Significant expenditures in additional research and development, clinical
testing, regulatory and sales and marketing activities will be necessary in
order for us to commercialize any products developed with our drug delivery
technology. While it is our strategy to enter into feasibility study agreements
with companies who own active compounds, and we have recently entered into one
such feasibility study, there can be no assurance that we will enter into any
additional feasibility studies. Moreover, there can be no assurance that this
feasibility study or any new feasibility studies will result in development or
license agreements. Without feasibility studies or development or license
agreements, we may need to scale back or
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terminate our efforts to develop our drug delivery technology.
Continued Listing on the Nasdaq National Market. Our common stock is
currently listed on the Nasdaq National Market under the symbol "SNUS." For
continued inclusion on the Nasdaq National Market, we must meet a net tangible
asset test and a public float test. In addition, Nasdaq requires a minimum bid
price of $1.00 per share for continued listing. We will need to raise additional
non-debt capital during 2000 to maintain our listing on NASDAQ. In the event
that we fail to satisfy the listing standards on a continuous basis, our
company's Common Stock may be removed from listing on the Nasdaq National
Market. If our Common Stock is delisted from the Nasdaq National Market, trading
of our Common Stock, if any, would be conducted in the over-the-counter market
in the so-called "pink sheets" or, if available, the NASD's "Electronic Bulletin
Board." As a result, stockholders could find it more difficult to dispose of, or
to obtain accurate quotations as to the value of, our Common Stock and the
trading price per share could be reduced.
Dependence on Key Employees. We are highly dependent on Michael A. Martino,
our President and Chief Executive Officer, and Gregory Sessler, our Senior Vice
President - Strategic Market Development and Chief Financial Officer. The loss
of either of these individuals or the inability to recruit and retain qualified
scientific personnel to perform research and development and qualified
management personnel could have a material adverse effect on our business,
financial condition and results of operations. There can be no assurance that we
will be able to attract and retain such personnel on acceptable terms, if at
all, given the competition for experienced scientists and other personnel among
numerous medical and pharmaceutical companies, universities and research
institutions.
ITEM 2. PROPERTIES
We currently lease approximately 27,000 square feet of laboratory and
office space in a single facility near Seattle Washington. The lease expires in
April 2002 and includes an option to extend the term of the lease for three
years. We believe that this facility will be adequate to meet our projected
needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In January 1998, we announced that we had filed a patent infringement
action in the U.S. District Court in Seattle, Washington, against Molecular
Biosystems Inc. ("MBI") and Mallinckrodt Medical Inc. (Mallinckrodt"). The suit
alleges that one of MBI's ultrasound contrast agents infringes one or more of
our patents. MBI has filed counterclaims alleging that the patents asserted by
us are invalid and not infringed, and that we have made false public statements
and engaged in other actions intended to damage MBI and one of its ultrasound
contrast agents. We do not believe there is any merit to these counterclaims and
intend to defend our position vigorously; however, there can be no assurance
that the counterclaims will be resolved in our favor. Discovery in the action is
now substantially completed, and on February 10, 2000, the Court issued an order
granting our Motion Regarding Claim Construction and construing disputed terms
in the patents we asserted in the lawsuit. Both parties expect to file shortly
summary judgment motions on various claims and defenses, and the trial date in
the lawsuit currently remains scheduled for
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April 24, 2000.
Under our agreement with Nycomed, Nycomed is an exclusive licensee of our
patents in a field of use including non-perfluoropentane ultrasound contrast
agents. Nycomed has the right to control the patent infringement portion of our
lawsuit against MBI and Mallinckrodt. The court has authorized Nycomed to be
joined as a party in this lawsuit.
In August and September 1998, various class action complaints were filed
in the Superior Court of Washington (the "State Action") and in the U.S.
District Court for the Western District of Washington (the "Federal Action")
against SONUS and certain of our officers and directors, alleging violations of
Washington State and U.S. securities laws. In October 1998, we and the
individual defendants moved to dismiss and stay the State Action. The state law
claims in the State Action were subsequently re-filed in the Federal Action. In
February 1999, plaintiffs filed a consolidated and amended complaint in the
Federal Action, alleging violations of Washington State and U.S. securities
laws. In March 1999, we and the individual defendants filed a motion to dismiss
the consolidated amended complaint in the Federal Action. In July 1999, the
Court entered an order denying in part and granting in part the motion to
dismiss the complaint in the Federal Action. In November 1999, we filed motions
for summary judgment and to stay discovery. On December 15, 1999, the Court
denied in part and granted in part the motion to stay discovery. The motion for
summary judgment is currently noted for July 10, 2000. We do not believe there
is any merit to the claims in these actions and we intend to defend our position
vigorously. Although we do not believe that we or any of our current or former
officers or directors have engaged in any wrongdoing, there can be no assurance
that this stockholder litigation will be resolved in our favor. Any settlement
or adverse judgment in excess of available insurance could have a material
adverse affect on our business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
Our common stock first began trading on the Nasdaq National Market under
the symbol SNUS on October 12, 1995. No cash dividends have been paid on the
common stock and we do not anticipate paying any cash dividends in the
foreseeable future. As of February 1, 2000, there were 156 stockholders of
record and approximately 6,500 beneficial stockholders of our company's Common
Stock. The high and low sales prices of our Common Stock as reported by Nasdaq
for the eight quarters ended December 31, 1999 are as follows:
HIGH LOW
---- ---
1998
First Quarter 40 1/2 17 3/4
Second Quarter 25 1/4 9 3/4
Third Quarter 17 6
Fourth Quarter 12 5/8 3 3/8
1999
First Quarter 10 7/8 4 7/8
Second Quarter 8 1/4 5
Third Quarter 7 1/8 3
Fourth Quarter 4 5/8 2 1/16
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ----------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues $ 12,050 $ 5,100 $ 18,900 $ 16,600 $ 4,500
Total operating expenses 12,088 17,012 18,763 14,988 9,416
Net income (loss) 435 (11,173) 1,011 1,722 (5,939)
Net income (loss) per share:
Basic $ 0.05 $ (1.30) $ 0.12 $ 0.20 $ (1.81)
Diluted $ 0.05 $ (1.30) $ 0.11 $ 0.20 $ (1.81)
Shares used in calculation of net income
(loss) per share:
Basic 8,836 8,622 8,565 8,481 3,281
Diluted 8,969 8,622 9,580 9,064 3,281
AS OF DECEMBER 31,
-------------------------------------------------------------- -
1999 1998 1997 1996 1995
------------ ----------- ----------- ----------- --------- -
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities $ 16,804 $ 16,955 $ 26,571 $ 25,131 $ 8,221
Total assets 18,089 18,818 28,946 26,762 19,646
Long-term liabilities -- 2,049 939 240 468
Stockholders' equity 10,048 7,495 18,505 16,877 10,947
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and we intend that such
forward-looking statements be subject to the safe harbors created thereby.
Examples of these forward-looking statements include, but are not limited to:
o the submission of applications for and the timing or likelihood of
marketing approvals for one or more indications;
o market acceptance of our products;
o our anticipated future capital requirements and the terms of any
capital financing;
o the decision of Abbott to market our products in the U.S., our ability
to locate and enter into agreements with distributors for
international territories, or with other parties in the U.S., if
Abbott should determine not to market our products in the U.S.;
o our ability to identify and enter into acceptable arrangements with
alternative sources of supply of EchoGen should Abbott determine not
to continue to manufacture EchoGen;
o the progress and results of clinical trials;
o the timing and amount of future contractual payments, product
revenues and operating expenses; and
o the anticipated outcome or financial impact of legal matters.
While these statements made by us are based on our current beliefs and judgment,
they are subject to risks and uncertainties that could cause actual results to
vary.
The discussion and analysis set forth below contains trend analysis,
discussions of regulatory status and other forward-looking statements. Actual
results could differ materially from those projected in the forward-looking
statement as a result of the following factors, among others:
o uncertainty of governmental regulatory requirements and lengthy
approval process;
o unproven safety and efficacy of products and uncertainty of clinical
trials;
o history of operating losses and uncertainty of future financial
results;
o future capital requirements and uncertainty of additional funding;
o dependence on third parties for funding, clinical development and
distribution;
o competition and risk of technological obsolescence;
o limited manufacturing experience and dependence on limited contract
manufacturers and suppliers;
o lack of marketing and sales experience;
o uncertainty of market acceptance;
o dependence on patents and proprietary rights;
o limitations on third-party reimbursement;
o uncertainty associated with drug delivery technology;
o continued listing on the NASDAQ National Market; and
o dependence on key employees.
See "Business -- Certain Factors That May Affect Our Business and Future
Results."
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MD&A OVERVIEW
In Management's Discussion and Analysis we explain the general financial
condition and the results of operations for our Company, including:
o an overview of our Company's business;
o regulatory progress;
o contractual agreements;
o results of operations and why those results are different from the
prior year;
o the capital resources our Company currently has and possible sources
of additional funding for future capital requirements;
o the market risk of our investment portfolio; and
o the results of our Year 2000 program.
BUSINESS OVERVIEW
Our Company is engaged in the research, development and commercialization
of ultrasound contrast agents and drug delivery systems based on our proprietary
technology. Our products are being developed for use in the diagnosis and
treatment of heart disease, cancer and other debilitating conditions. We have
financed our research and development and clinical trials through payments
received under contractual agreements, private equity and debt financings, and
an initial public offering ("IPO") of common stock completed in October 1995.
Clinical trials of our initial ultrasound contrast product under development,
EchoGen(R) (perflenapent injectable emulsion), began in January 1994. In 1996,
we filed a New Drug Application ("NDA") with U.S. Food and Drug Administration
("FDA") for EchoGen as well as a Marketing Authorization Application ("MAA")
with the European Medicines Evaluation Agency ("EMEA").
REGULATORY PROGRESS
In April 1999, we received an "approvable letter" from the FDA for EchoGen.
The FDA letter gave the conditions that must be satisfied before final approval.
In September 1999, we filed a formal response to the conditions of the
approvable letter. The FDA has notified us that it expects to complete its
review of our response by March 2000. Although it is inappropriate for us to
speculate on the outcome of the FDA review, we believe we have addressed the
conditions set forth in the approvable letter. No assurance can be given that
the FDA will review the response to the approvable letter in a timely manner or
that the FDA will ultimately approve the NDA.
In March 1998, the EMEA's Committee for Proprietary Medicinal Products
("CPMP") issued a positive opinion on EchoGen for use as a transpulmonary
echocardiographic contrast agent in patients with suspected or established
cardiovascular disease who have had previous inconclusive non-contrast studies.
In July 1998, the EMEA ratified the CPMP recommendation and granted a marketing
authorization for EchoGen in the 15 countries of the European Union ("E.U.").
During 1998 and 1999, we submitted to the EMEA certain variations of our
marketing authorization to bring the manufacturing process and specifications
for European product in line with the process and specifications submitted to
the FDA for approval in the U.S. Also during 1999, we
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received notifications that the variations to our marketing license were
approved by the EMEA with the final notification received in December 1999. See
"Certain Factors that May Affect Our Business and Future Results - Uncertainty
of Government Regulatory Requirements; Lengthy Approval Process."
CONTRACTUAL AGREEMENTS
In 1999, we entered into a license agreement with Nycomed Imaging AS
("Nycomed") for the cross-license of certain proprietary ultrasound contrast
agent technologies. Under the terms of the agreement, we provided Nycomed with
an exclusive license to our ultrasound contrast patents except as related to
perfluoropentane, the gas we use in our ultrasound contrast products. Under the
exclusive license to the patents, Nycomed also has the right to freely
sublicense to other companies with a portion of any sublicense fees to be paid
to us. In addition, we have a worldwide, non-exclusive license to certain of
Nycomed's ultrasound contrast agent patents. We also have the right to
sublicense these patents to our collaborative partners. Under the agreement,
Nycomed has paid us a license fee of $10.0 million. In addition, both companies
have agreed to pay royalties to each other based on future sales of our
respective ultrasound contrast agents.
Also, under the agreement, we transferred to Nycomed the responsibilities
and legal costs associated with our patent infringement litigation with
Molecular Biosystems and Mallinckrodt Medical Inc. See "Legal Proceedings."
In 1996, we entered into two agreements with Abbott Laboratories ("Abbott")
for the marketing and selling of our ultrasound contrast agents, including
EchoGen, in: (1) the United States (the "Abbott U.S. Agreement") and; (2)
certain international territories including Europe, Latin America, Canada,
Middle East, Africa and certain Asia/Pacific countries ("Abbott International
Agreement"). In January 1999, we amended the Abbott U.S. Agreement ("Amended
Abbott U.S. Agreement").
Under the Amended Abbott U.S. Agreement, Abbott agreed to make certain
payments to us, primarily conditioned upon the achievement of regulatory
approval and certain commercialization milestones potentially totaling $31.0
million of which we have received $23.0 million as of December 31, 1999. In
addition, Abbott purchased in 1996, for $4.0 million, warrants to acquire
500,000 shares of our common stock. The warrants are exercisable over five years
at $16.00 per share.
In February 2000, we entered into an amendment with Abbott that further
modifies the Amended Abbott U.S. Agreement. The modified agreement provides
Abbott the option either to market and distribute EchoGen in the U.S. subject to
obtaining necessary regulatory approvals, or to terminate the Amended Abbott
U.S. Agreement, whether regulatory approvals are received or not. Abbott's
option terminates on March 31, 2000. No financial payments will be made during
the period of Abbott's option. If Abbott elects to market and sell EchoGen in
the U.S., the parties have agreed to negotiate a revision to the Amended Abbott
U.S. Agreement by April 30, 2000 to reflect any changes in responsibilities of
the parties, the status of regulatory approval and current market conditions. If
Abbott elects to terminate the Amended Abbott U.S.
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Agreement by March 31, 2000, Abbott will have no further economic or other
responsibilities under the Amended Abbott U.S. Agreement and all rights and
marketing materials related to EchoGen will be returned to us. We have also
agreed with Abbott to amend the manufacturing and supply agreement under which
Abbott manufactures EchoGen for us. If the Amended Abbott U.S. Agreement is
terminated, Abbott will continue to manufacture EchoGen following FDA approval,
if obtained, for a period of two years, but in no event later than July 1, 2002
under the manufacturing and supply agreement with Abbott. There can be no
assurance that Abbott will elect its option to market and distribute EchoGen in
the U.S., or even if Abbott should determine to do so, that we and Abbott will
agree on mutually acceptable revisions to the Amended Abbott U.S. Agreement by
April 30, 2000. Furthermore, there can be no assurance that in the event of
termination of the Amended Abbott U.S. Agreement, that we can successfully
market and distribute EchoGen, or that we will be successful in obtaining other
partners to market and distribute EchoGen, or that we will be able to locate and
qualify an alternative manufacturer of EchoGen.
In October 1999, our Company and Abbott Laboratories International Division
("Abbott International") restructured the Abbott International Agreement. Under
the restructured agreement, Abbott International has returned all exclusive
marketing rights to EchoGen to us. As of the date of restructuring, Abbott
International has paid $14.7 million to us. In addition, under the restructured
Abbott International Agreement, we have agreed to share with Abbott
International, 21% of our net profits from the sale of EchoGen and will also
share 50% of any up-front license fees paid to us by new partners, of which 50%
will be credited against the share of net profits that we will pay to Abbott
International. We have commenced discussions with new potential marketing
partners for the territories under the Abbott International Agreement. No
assurance can be given that we will secure new marketing partners for the
territories under the Abbott International Agreement.
Under the restructured international agreement, Abbott International also
retains a five-year option to elect to become a co-marketer of QW7437, our
second ultrasound contrast agent under development. Abbott International has
also agreed not to market or sell a competing ultrasound contrast product during
the option period and thereafter if it elects its option to co-market QW7437. In
the event the Amended Abbott U.S. Agreement is terminated, Abbott
International's rights to a percentage of our profits or upfront license fees
and co-marketing rights to QW7437 will terminate.
In addition to the development of our ultrasound contrast agents, we
believe our drug delivery technology can be applied to the formulation of many
water insoluble active compounds which are either currently in use or being
investigated as therapeutic agents. Our strategy is to enter into feasibility
study agreements with companies who own active compounds, typically large
pharmaceutical companies, to determine if our drug delivery strategy enhances
their active compound. In December 1999, we entered into our first feasibility
study agreement. Under this feasibility study agreement, we have agreed to use
our reasonable best efforts to develop new formulations of an active compound
and provide them to the pharmaceutical company for further evaluation. If the
feasibility study is successful, our goal is to negotiate a development and
license agreement with the pharmaceutical company.
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36
RESULTS OF OPERATIONS
Our results of operations have varied and will continue to vary
significantly and depend on, among other factors:
o timing of payments under contractual and license agreements;
o timing of regulatory approvals;
o entering into additional contractual agreements; and
o timing and costs of clinical trials, legal matters and expenses
related to product commercialization.
YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
To date, our reported revenues have been derived from payments received
under contractual and license agreements with third parties. Revenue was $12.1
million for the year ended December 31, 1999 compared to $5.1 million in the
prior year. Revenues during 1999 were derived from our agreements with Nycomed
($10.0 million) and Abbott ($2.1 million). Revenue received in the prior year
was derived from payments received under our agreements with Abbott.
Research and development expenses were $5.6 million for the year ended
December 31, 1999 compared with $10.5 million in the prior year. The decrease
from the prior year was primarily due to a reduction in clinical trials and
associated development activity for EchoGen.
General and administrative expenses were $6.5 million for each of the years
ended December 31, 1999 and 1998. We had an increase in intellectual property
legal costs in 1999 offset by decreases in medical education and other marketing
expenses.
Revenues in future periods will be primarily dependent upon the achievement
and timing of certain regulatory and commercialization events. In addition, if
EchoGen obtains U.S. regulatory approval, total operating expenses are expected
to increase in future periods due to ongoing and planned clinical trials to
study additional indications for EchoGen, new product research and development,
and higher marketing and administrative expenses in conjunction with the
commercialization of EchoGen.
Interest income, net of interest expense, was $472,000 for the year ended
December 31, 1999 compared to $739,000 for the prior year. The decrease was
primarily due to the lower average levels of invested cash during 1999 and the
decrease in interest expense as the result of the conversion of long-term debt
to equity in June of 1999.
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Revenue received under contractual agreements was $5.1 million for the year
ended December 31, 1998 compared with $18.9 million in the prior year. All
revenue during 1998 represented payments under our strategic alliance agreements
with Abbott. Revenues in 1997 represented milestone payments of $18.5 million
and $0.4 million from Abbott and Daiichi Pharmaceutical Co., Ltd., respectively.
36
37
Research and development expenses were $10.5 million for the year ended
December 31, 1998 compared with $11.6 million in the prior year. The decrease
was primarily due to a reduction in clinical trial activity when compared to the
prior year, offset in part by additional expenses related to the regulatory
approval process.
General and administrative expenses were $6.5 million for the year ended
December 31, 1998 compared with $7.2 million in the prior year. The decrease was
primarily due to a reduction in marketing programs due to the delay in U.S.
regulatory approval of EchoGen, offset in part by increases in legal costs.
Interest income, net of interest expense, was $739,000 for the year ended
December 31, 1998 compared to $965,000 in the prior year. The decrease was
primarily due to the lower levels of invested cash during 1998 and higher
interest expense for the amounts payable to Abbott for clinical development
funding.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed operations with payments from contractual
agreements with third parties, proceeds from equity financings and a bank line
of credit. At December 31, 1999, we had cash, cash equivalents and marketable
securities of $16.8 million compared to $17.0 million at December 31, 1998. The
slight decrease was primarily due to cash used in operations during the year
ended December 31, 1999.
We have a bank loan agreement which provides for a $5.0 million revolving
line of credit facility and bears interest at the prime rate plus 1.0% per
annum. At December 31, 1999, we had borrowings of $5.0 million outstanding under
the line of credit. The line of credit expires August 30, 2000 and is secured by
tangible assets. The Company is required to maintain a minimum of $4.0 million
of cash in order to borrow under the line of credit, and the borrowed funds are
required to be held at the bank. We cannot give assurance that we will be able
to maintain the minimum balances necessary to borrow under the line of credit.
We expect that our cash needs will increase significantly in future periods
due to pending and planned clinical trials and higher administrative and
marketing expenses as we prepare for commercialization of EchoGen, if approved
for marketing. Based on our current operating plan, we estimate that existing
cash and marketable securities will be sufficient to meet our cash requirements
through the next 12 months. We plan to seek additional funding in 2000 through
available means, which may include debt and/or equity financing or funding under
additional third party agreements. We cannot give assurance that financing will
be available on acceptable terms, if at all. Our future capital requirements
depend on many factors including:
o the ability to obtain continued funding under existing contractual and
licensing agreements;
o the ability to attract and retain new partners;
o the ability to maintain our bank line of credit;
o the time and costs required to gain regulatory approvals;
37
38
o the progress of our research and development programs and clinical
trials;
o the costs of filing, prosecuting and enforcing patents, patent
applications, patent claims and trademarks;
o the costs of marketing and distribution;
o the status of competing products;
o the market acceptance and third-party reimbursement of our products,
if and when approved; and
o the cost of defending, and any damages or settlement payments that may
be paid pursuant to existing legal proceedings.
We cannot give assurance that regulatory approvals will be achieved in the
near-term or at all or that, in any event, additional financing will be
available on acceptable terms, if at all. Any equity financing would likely
result in substantial dilution to our existing stockholders. If we are unable to
raise additional financing, we may be required to curtail or delay the
development of our products and new product research and development, which
could seriously harm our business.
MARKET RISK
The market risk inherent in our short-term investment and debt portfolio
represents the potential loss arising from adverse changes in interest rates. If
market rates hypothetically increase immediately and uniformly by 100 basis
points from levels at December 31, 1999, the decline in the fair value of the
investment portfolio and increased interest expense on our short-term debt
portfolio would not be material. Because we have the ability to hold our fixed
income investments until maturity, we do not expect our operating results or
cash flows to be affected to any significant degree by a sudden change in market
interest rates on our securities portfolio.
YEAR 2000
In 1999, we undertook a comprehensive review of our information technology
computer and business systems and concluded that the Year 2000 issue (Y2k) did
not pose a significant operational problem. In addition, we surveyed significant
vendors, including Abbott, to determine any possible Y2k risks. We also
established contingency plans to address "high-risk" issues that could have
affected day-to-day operations or delayed our efforts to bring products to
market.
Based on a full review of our computer and business systems and significant
third party vendors, we have concluded that the change from the year 1999 to
2000 did not have an effect on our day-to-day operations or our efforts to bring
products to market. The total cost of addressing Y2k did not exceed $25,000.
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39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Response to this item is included in "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSTS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Market Risk."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS: PAGE
- ------------------------------ ----
Report of Ernst and Young LLP, Independent Auditors........................................ 40
Balance Sheets as of December 31, 1999 and 1998............................................ 41
Statements of Operations for the years ended December 31, 1999, 1998 and 1997.............. 42
Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997.... 43
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.............. 44
Notes to the Financial Statements.......................................................... 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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40
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
SONUS Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of SONUS Pharmaceuticals,
Inc. as of December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SONUS Pharmaceuticals, Inc.
at December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Seattle, Washington
January 21, 2000,
except for Note 12, as to which
the date is February 15, 2000
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41
SONUS PHARMACEUTICALS, INC.
BALANCE SHEETS
DECEMBER 31,
------------------------------
1999 1998
------------ ------------
ASSETS
Current assets:
Cash, cash equivalents and marketable securities................. $ 16,804,486 $ 16,954,842
Other current assets............................................. 422,851 419,018
------------ ------------
Total current assets.......................................... 17,227,337 17,373,860
Equipment, furniture and leasehold improvements, net............... 861,434 1,444,090
------------ ------------
Total assets....................................................... $ 18,088,771 $ 18,817,950
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit.............................................. $ 5,000,000 $ 5,000,000
Accounts payable and accrued expenses............................ 2,826,169 2,954,530
Accrued clinical trial expenses.................................. 215,102 1,226,335
Current portion of capital lease obligations..................... -- 93,178
------------ ------------
Total current liabilities..................................... 8,041,271 9,274,043
Long-term debt..................................................... -- 2,049,221
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
5,000,000 shares authorized; no shares outstanding............ -- --
Common stock, $.001 par value:
30,000,000 shares authorized; 8,989,972 and 8,632,225 shares
issued and outstanding in 1999 and 1998, respectively......... 37,142,965 35,009,368
Accumulated deficit............................................. (27,071,604) (27,506,274)
Accumulated other comprehensive loss............................ (23,861) (8,408)
------------ ------------
Total stockholders' equity.................................... 10,047,500 7,494,686
------------ ------------
Total liabilities and stockholders' equity......................... $ 18,088,771 $ 18,817,950
============ ============
See accompanying notes.
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SONUS PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenues:
Contract and licensing revenue.......................... $ 12,050,000 $ 5,100,000 $ 18,900,000
Operating expenses:
Research and development................................ 5,585,988 10,463,573 11,561,849
General and administrative.............................. 6,501,647 6,548,833 7,201,553
------------ ------------ ------------
Total operating expenses............................. 12,087,635 17,012,406 18,763,402
------------ ------------ ------------
Operating income (loss)................................... (37,635) (11,912,406) 136,598
Other income (expense):
Interest income......................................... 568,959 970,146 1,093,149
Interest expense........................................ (96,654) (231,024) (128,468)
------------ ------------ ------------
Income (loss) before income taxes......................... 434,670 (11,173,284) 1,101,279
Income taxes.............................................. -- -- 90,000
------------ ------------ ------------
Net income (loss)......................................... $ 434,670 $(11,173,284) $ 1,011,279
============ ============ ============
Net income (loss) per share:
Basic.................................................. $ 0.05 $ (1.30) $ 0.12
Diluted................................................ $ 0.05 $ (1.30) $ 0.11
Shares used in calculation of net income (loss) per share:
Basic.................................................. 8,836,406 8,621,759 8,565,658
Diluted................................................ 8,969,404 8,621,759 9,580,240
See accompanying notes.
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43
SONUS PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER
COMMON STOCK ACCUMULATED COMPREHENSIVE DEFERRED
SHARES AMOUNT DEFICIT LOSS COMPENSATION TOTAL
--------- ----------- ------------- ------------- ------------ -----------
Balance at December 31, 1996........ 8,530,911 $34,275,015 $(17,344,269) $ (11,105) $ (42,391) $ 16,877,250
Comprehensive income:
Net income..................... -- -- 1,011,279 -- -- 1,011,279
Unrealized gains on
investments.................. -- -- -- 5,146 -- 5,146
------------
Comprehensive income........... 1,016,425
Issuance of common stock............ 80,465 585,222 -- -- -- 585,222
Amortization of compensation........ -- -- -- -- 25,720 25,720
--------- ----------- ------------ ---------- ---------- ------------
Balance at December 31, 1997........ 8,611,376 34,860,237 (16,332,990) (5,959) (16,671) 18,504,617
Comprehensive loss:
Net loss....................... -- -- (11,173,284) -- -- (11,173,284)
Unrealized losses on
investments.................. -- -- -- (2,449) -- (2,449)
------------
Comprehensive loss............. (11,175,733)
Issuance of common stock............ 20,849 149,131 -- -- -- 149,131
Amortization of compensation........ -- -- -- -- 16,671 16,671
--------- ----------- ------------ ---------- ---------- ------------
Balance at December 31, 1998........ 8,632,225 35,009,368 (27,506,274) (8,408) -- 7,494,686
Comprehensive income:
Net income..................... -- -- 434,670 -- -- 434,670
Unrealized losses on
investments.................. -- -- -- (15,453) -- (15,453)
-----------
Comprehensive income........... 419,217
Issuance of common stock............ 357,747 2,133,597 -- -- -- 2,133,597
--------- ----------- ------------ ---------- ---------- ------------
Balance at December 31, 1999........ 8,989,972 $37,142,965 $(27,071,604) $ (23,861) $ -- $ 10,047,500
========= =========== ============ ========== ========== ============
See accompanying notes.
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44
SONUS PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997
------------- --------------- ---------------
OPERATING ACTIVITIES:
Net income(loss)........................................................... $ 434,670 $ (11,173,284) $ 1,011,279
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................................ 627,171 831,188 619,268
Amortization of discount on marketable securities........................ (34,852) (5,571) (24,815)
Realized (gains) losses on marketable securities......................... 4,976 (13,952) 21,383
Changes in operating assets and liabilities:
Other current assets..................................................... (3,832) 220,952 (177,359)
Accounts payable and accrued expenses.................................... (128,361) 342,465 408,259
Accrued clinical trial expenses ......................................... (1,011,233) (516,873) 529,645
Deferred revenue......................................................... -- -- (1,000,000)
------------- -------------- ---------------
Net cash provided by (used in) operating activities........................ (111,461) (10,315,075) 1,387,660
INVESTING ACTIVITIES:
Purchases of equipment, furniture and leasehold improvements............... (44,515) (523,870) (1,159,782)
Purchases of marketable securities......................................... (20,758,859) (28,308,701) (36,802,059)
Proceeds from sales of marketable securities............................... 14,564,759 24,600,104 22,144,047
Proceeds from maturities of marketable securities.......................... 7,049,147 13,292,590 11,243,205
------------- --------------- ---------------
Net cash provided by (used in) investing activities........................ 810,532 9,060,123 (4,574,589)
FINANCING ACTIVITIES:
Proceeds from line of credit borrowings.................................... 20,000,000 20,000,000 20,000,000
Repayment of line of credit borrowings..................................... (20,000,000) (20,000,000) (20,000,000)
Increase in long-term debt................................................. 30,783 1,203,282 845,939
Repayment of capital lease obligations..................................... (93,178) (146,762) (227,620)
Proceeds from exercise of stock options and warrants....................... 53,592 149,131 585,222
------------- --------------- ---------------
Net cash provided by (used in) financing activities........................ (8,803) 1,205,651 1,203,541
------------- --------------- ---------------
Change in cash and cash equivalents for the period......................... 690,268 (49,301) (1,983,388)
Cash and cash equivalents at beginning of period........................... 5,203,926 5,253,227 7,236,615
------------- --------------- ---------------
Cash and cash equivalents at end of period................................. 5,894,194 5,203,926 5,253,227
Marketable securities at end of period..................................... 10,910,292 11,750,916 21,317,835
------------- --------------- ---------------
TOTAL CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES................... $ 16,804,486 $ 16,954,842 $ 26,571,062
============= =============== ===============
Supplemental cash flow information:
Interest paid............................................................ $ 43,069 $ 64,531 $ 127,770
Income taxes paid........................................................ $ -- $ 7,500 $ 55,272
Supplemental disclosure of non cash investing and financing activities:
Conversion of long-term debt to common stock............................. $ 2,080,005 $ -- $ --
See accompanying notes.
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45
SONUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
SONUS Pharmaceuticals, Inc. (the "Company") is a developer of proprietary
ultrasound contrast agents and drug delivery systems for use in the diagnosis
and treatment of heart disease, cancer and other debilitating conditions.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with a
maturity of three months or less at the date of purchase.
MARKETABLE SECURITIES
The Company classifies the marketable securities investment portfolio as
available-for-sale, and such securities are stated at fair value based on quoted
market prices, with the unrealized gains and losses included as a component of
accumulated deficit. Interest earned on securities available-for-sale is
included in interest income. The cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion are included in interest income. Realized gains
and losses and declines in value judged to be other than temporary on securities
available-for-sale also are included in interest income. The cost of securities
sold is based on the specific identification method.
CONCENTRATIONS OF CREDIT RISK
The Company invests its excess cash in accordance with investment
guidelines which limit the credit exposure to any one financial institution and
to any one type of investment, other than securities issued by the U.S.
government. The guidelines also specify that the financial instruments are
issued by institutions with strong credit ratings. These securities are
generally not collateralized and mature within one year.
REVENUE RECOGNITION
Payments under contractual agreements are recorded as earned based upon the
provisions of each agreement. Payments received which have not met the
appropriate revenue recognition criteria are recorded as deferred revenue.
EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements are stated at cost.
Depreciation of equipment is provided using the straight-line basis over three
to five years, the estimated useful life of the assets. Leasehold improvements
are amortized over the lesser of the economic useful lives of the improvements
or the term of the related lease.
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46
STOCK-BASED COMPENSATION
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", the Company has elected to continue
to account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the market price of the
Company's common stock at the date of grant over the stock option exercise
price. Under the Company's plans, stock options are generally granted at fair
market value.
COMPREHENSIVE INCOME
In accordance with Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" (SFAS 130), the Company has reported
comprehensive income, defined as net income (loss) plus other comprehensive
income, in the Statements of Stockholders' Equity. The total of other
accumulated comprehensive income consists of unrealized gains and losses on
marketable securities.
PER SHARE DATA
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" the Company has presented both basic and diluted earnings
per share ("EPS"). Basic EPS is based on the weighted average number of common
shares outstanding. Diluted EPS is based on the weighted average number of
common shares and dilutive potential common shares. Dilutive potential common
shares are calculated under the treasury stock method and consist of unexercised
stock options and warrants.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. MARKETABLE SECURITIES
Marketable securities consist of the following at December 31, 1999 and
1998:
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ------------ ------------ ------------
1999:
U.S. Government Obligations ................. $ 1,499,545 $ -- $ (1,772) $ 1,497,773
Corporate Debt Securities (principally
commercial paper) ......................... 9,426,200 1,189 (14,870) 9,412,519
------------ ------------ ------------ ------------
$ 10,925,745 $ 1,189 $ (16,642) $ 10,910,292
============ ============ ============ ============
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UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ------------ ------------ ------------
1998:
U.S. Government Obligations ................. $ 3,260,271 $ 3,219 $ (208) $ 3,263,282
Corporate Debt Securities (principally
commercial paper) .................... 8,493,094 1,099 (6,559) 8,487,634
------------ ------------ ------------ ------------
$ 11,753,365 $ 4,318 $ (6,767) $ 11,750,916
============ ============ ============ ============
The realized gains on sales of available-for-sale securities were $3,015,
$14,000 and $29,000 in 1999, 1998 and 1997, respectively. The realized losses on
sales of available for sale securities were $7,991, $0 and $50,000 in 1999, 1998
and 1997, respectively. All marketable securities at December 31, 1999 mature
within one year.
3. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements consist of the following:
1999 1998
---------- ----------
Laboratory equipment ............................. $2,221,744 $2,183,489
Office furniture and equipment ................... 1,037,586 1,031,327
Leasehold improvements ........................... 782,060 782,060
---------- ----------
4,041,390 3,996,876
Less accumulated depreciation and amortization ... 3,179,956 2,552,786
---------- ----------
$ 861,434 $1,440,090
========== ==========
Depreciation expense was $627,171, $814,517 and $593,548 for the years
ended December 31, 1999, 1998 and 1997, respectively.
4. DEBT
The Company has a Loan Agreement with a bank which provides for a $5.0
million revolving line of credit facility. Borrowings bear interest at the prime
rate plus 1.0% per annum (9.50% at December 31, 1999). At December 31, 1999 and
December 31, 1998, there was $5.0 million outstanding under the line of credit.
The line of credit expires in August 2000 and is secured by the tangible assets
of the Company. The Company is required to maintain a minimum of $4.0 million of
cash in order to borrow under the line of credit, and the borrowed funds are
required to be held at the bank.
Pursuant to the Company's collaborative agreement with Abbott Laboratories
("Abbott") (see Note 5), Abbott agreed to fund certain clinical trials of the
Company during 1997 and 1998. Of the total clinical trial funding received from
Abbott, 50% was to be paid back to Abbott within five years of the receipt of
funds, plus accrued interest, in either cash or exchange for common stock of the
Company at the then fair market value. In June 1999, the liability to Abbott of
$2,080,005, representing 50% of clinical trial funding plus interest, was
converted into 343,802 shares of common stock of the Company.
5. CONTRACTUAL AGREEMENTS
In 1999, the Company entered into a license agreement with Nycomed Imaging
AS ("Nycomed") for the cross-license of certain proprietary ultrasound contrast
agent technologies
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48
and received a license fee of $10.0 million. Under the terms of the agreement,
the Company provides Nycomed with an exclusive license to its ultrasound
contrast patents except as related to perfluoropentane, the gas used by the
Company in its ultrasound contrast products. Under the exclusive license to the
patents, Nycomed also has the right to freely sublicense to other companies with
a portion of any sublicense fees to be paid to the Company. In addition, the
Company has a worldwide, non-exclusive license to certain of Nycomed's
ultrasound contrast agent patents. The Company also has the right to sublicense
these patents to its collaborative partners. In addition to the license fee,
both companies have agreed to pay royalties to each other based on future sales
of their respective ultrasound contrast agents.
In 1996, the Company entered into two agreements with Abbott Laboratories
("Abbott") for the marketing and selling of the Company's ultrasound contrast
agents, including EchoGen, in: (1) the United States (the "Abbott U.S.
Agreement") and; (2) certain international territories including Europe, Latin
America, Canada, Middle East, Africa and certain Asia/Pacific countries ("Abbott
International Agreement"). In January 1999, the Company and Abbott amended the
Abbott U.S. Agreement ("Amended Abbott U.S. Agreement"). In February 2000, the
Company entered into an amendment with Abbott that further modifies the Amended
Abbott U.S. Agreement. The modified agreement provides Abbott the option either
to market and distribute EchoGen in the U.S. subject to obtaining certain
regulatory approvals, or to terminate the Amended Abbott U.S. Agreement. See
Footnote 12 - Subsequent Event.
Under the January 1999 Amended Abbott U.S. Agreement, the Company has
primary responsibility for clinical development, regulatory affairs, and medical
and technical marketing support of EchoGen, and Abbott has primary
responsibility for U.S. marketing and sales. Under the Amended Abbott U.S.
Agreement, Abbott has agreed to pay the Company $31.0 million primarily
conditioned upon the achievement of regulatory approval and certain
commercialization milestones, of which the Company had received $23.0 million as
of December 31, 1999. After the U.S. Food and Drug Administration ("FDA") has
approved the marketing of EchoGen, for which there can be no assurance, Abbott
has agreed to pay the Company 47% of EchoGen revenues in the U.S., a portion of
which the Company must use to fund its responsibilities under the Amended Abbott
U.S. Agreement. Subject to early termination, the Amended Abbott U.S. Agreement
spans the later of the life of the patents relating to EchoGen or the
introduction of a generic equivalent by a third party. Abbott can acquire the
rights to certain additional indications for EchoGen by making additional
clinical support payments. In addition, Abbott paid $4.0 million in 1996 for
five-year warrants to acquire 500,000 shares of the Company's common stock at an
exercise price of $16.00 per share.
In October 1999, the Company and Abbott Laboratories International Division
("Abbott International") restructured the Abbott International Agreement. As of
the date of restructuring, Abbott International has paid $14.7 million to the
Company. Under the restructured international agreement, Abbott International
has returned to the Company all exclusive marketing rights to EchoGen. Also, the
Company agreed to share with Abbott International 21% of the Company's net
profits from the sale of EchoGen and will also share 50% of any up-front license
fees paid to the Company by new partners, of which 50% will be credited against
the share of net profits the Company will pay to Abbott International. In
addition, Abbott International retains a five-year option to elect to become a
co-marketer of QW7437, the Company's second ultrasound contrast agent under
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development. Abbott International has also agreed not to market or sell a
competing ultrasound contrast product during the option period and thereafter,
if it elects its option to co-market QW7437.
In March 1995, the Company granted Daiichi Pharmaceutical Co., Ltd.
("Daiichi"), exclusive marketing and distribution rights to EchoGen in Japan and
in certain other countries in the Pacific Rim. In November 1998, the Company and
Daiichi terminated the licensing agreement and the Company has no further
obligation under the agreement. As of the date of termination, Daiichi paid the
Company option, license and milestone fees totaling $12.8 million.
6. INCOME TAXES
Income tax expense consists of the following:
1999 1998 1997
------- ------- --------
Federal - current ............................... $ -- $ -- $ 50,000
Foreign - current ............................... -- -- 40,000
------- ------- --------
Total ........................................... $ -- $ -- $ 90,000
======= ======= ========
The Company's foreign income tax expense in 1997 is for withholding taxes
paid in Japan relating to the collaborative payments made by Daiichi (see Note
5).
A reconciliation of the Federal Statutory tax rate of 34% to the Company's
effective income tax rate follows:
1999 1998 1997
-------- -------- --------
Statutory tax rate .............................. 34.00% (34.00%) 34.00%
Utilization of net operating loss carryforwards.. (37.95) -- (35.91)
Change in valuation allowance ................... -- 34.20 --
Permanent differences ........................... 3.95 (0.20) 1.91
Federal tax expense (AMT) ....................... -- -- 4.54
Foreign tax expense ............................. -- -- 3.63
-------- -------- --------
Effective tax rate.............................. --% --% 8.17%
======== ======== ========
Significant components of the Company's net deferred tax assets and
liabilities as of December 31, 1999 and 1998 are as follows:
1999 1998
------------ ------------
Deferred tax assets:
Federal net operating loss carryforwards ......................... $ 8,580,000 $ 8,745,000
Accrued expenses ................................................. 126,000 139,000
Research and development credits ................................. 1,347,000 1,212,000
Foreign tax credits .............................................. 1,183,000 1,183,000
AMT tax credits .................................................. 68,000 --
Book in excess of tax depreciation expense ....................... 149,000 87,000
------------ ------------
Gross deferred tax assets .......................................... 11,453,000 11,366,000
Valuation allowance for net deferred tax assets .................. (11,453,000) (11,366,000)
------------ ------------
Net deferred tax assets ............................................ $ -- $ --
============ ============
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Due to the uncertainty of the Company's ability to generate taxable income
to realize its net deferred tax assets at December 31, 1999 and 1998, a
valuation allowance has been recognized for financial reporting purposes. The
Company's valuation allowance for deferred tax assets increased $87,000 and
$3,962,000 for the years ended December 31, 1999 and 1998, respectively.
At December 31, 1999 the Company has federal net operating loss
carryforwards of approximately $25,236,000 for income tax reporting purposes and
research and development and AMT tax credit carryforwards of approximately
$1,415,000. The federal operating loss carryforwards and research and
development credits begin to expire in 2006.
The initial public offering of common stock by the Company caused an
ownership change pursuant to applicable regulations in effect under the Internal
Revenue Code of 1986. Therefore, the Company's use of losses incurred through
the date of ownership change will be limited during the carryforward period and
may result in the expiration of net operating loss carryforwards before
utilization.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
At December 31, 1999, the Company had 3,351,491 shares of common stock
reserved for future issuance.
STOCK OPTIONS
As of December 31, 1999, 2,800,000 shares have been reserved for issuance
under the Company's employee stock option plans and 250,000 shares have been
reserved under the Company's director stock option plan. As of December 31,
1999, there were 736,759 shares available for future grant under all plans. In
addition, in 1994, the Board of Directors granted an option to purchase 76,335
shares of common stock to the Company's founder at an exercise price of $0.66
per share. Employee stock options vest over a period of time determined by the
Board of Directors, generally four years, and director options are fully vested
at the date of grant. Stock options generally expire 10 years from the date of
grant.
A summary of activity related to the Company's stock options follows:
EXERCISE
SHARES PRICE
---------- ---------------
Balance, December 31, 1996........................ 823,264 $ .07 -- 23.00
Granted......................................... 287,802 24.13 -- 44.00
Exercised....................................... (51,484) .20 -- 23.00
Canceled........................................ (14,663) .20 -- 40.13
---------
Balance, December 31, 1997........................ 1,044,919 .07 -- 44.00
Granted......................................... 823,215 6.25 -- 38.63
Exercised....................................... (11,765) .07 -- 24.13
Canceled........................................ (545,278) 3.93 -- 44.00
---------
Balance, December 31, 1998........................ 1,311,091 .20 -- 44.00
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EXERCISE
SHARES PRICE
---------- ---------------
Granted......................................... 814,026 3.69 -- 6.94
Exercised....................................... (5,158) 3.93 -- 6.25
Canceled........................................ (134,077) 5.94 -- 44.00
---------
Balance, December 31, 1999........................ 1,985,882 .20 -- 44.00
=========
Options exercisable at December 31, 1999.......... 990,462 $ .20 -- 44.00
=========
In 1998, the Company repriced 444,691 outstanding stock options for
non-officer employees from a weighted average exercise price of $18.90 to $6.25.
The options are included in both granted and canceled shares in 1998.
The following table summarizes information about stock options outstanding
at December 31, 1999:
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
RANGE OF NUMBER AVERAGE REMAINING EXERCISE OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ------------------- ---------------- -------------------- -------------- -------------- -------------
$ 0.20-$ 3.97 182,951 6.60 years $ 1.80 122,451 $ 0.75
$ 5.94-$ 8.19 1,125,728 8.70 years $ 6.23 239,062 $ 6.58
$ 8.25-$20.50 552,020 6.22 years $13.68 534,118 $13.75
$27.75-$44.00 125,183 7.46 years $32.50 94,831 $32.40
For total options outstanding as of December 31, 1999, the weighted average
exercise price and weighted average remaining contractual life was $9.55 and
7.74 years, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), the Company has elected to
continue following the intrinsic value method allowed under the statement for
its stock option plans and present pro forma disclosures using the fair value
method. Had the Company elected to recognize compensation cost based on the fair
value of the options as prescribed by SFAS 123, the Company would not have
reported net income for the periods ended December 31, 1999 and 1997, rather the
pro forma amounts recognized under FAS 123 would have resulted in a net loss for
the those periods. The net loss and associated basic net loss per share amounts
would have been $1.7 million or $0.19 per share, $13.5 million or $1.57 per
share and $1.0 million or $0.11 per share for the years ended December 31, 1999,
1998 and 1997, respectively. The fair value of each option is estimated using
the Black-Scholes option pricing model. The assumptions used in this model
include an estimated option life of one to four years, expected stock price
volatility ranging from .576 to .873, a dividend yield of 0.0% and a risk-free
interest rate at the grant date ranging from 4.43% to 7.70%. The weighted
average fair value per share of options granted during 1999, 1998 and 1997 was
$3.92, $4.27 and $14.91, respectively.
STOCK PURCHASE PLAN
The Company has an employee stock purchase plan whereby employees may
contribute up to 15% of their compensation to purchase shares of the Company's
common stock at 85% of the stock's fair market value at the lower of the
beginning or end of each three-month offering period. Shares purchased under the
plan were 8,787, 9,698, and 4,012 in 1999, 1998 and 1997,
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respectively. At December 31, 1999, 65,220 shares were reserved for future
purchases by employees under the plan.
WARRANTS
In connection with the Abbott U.S. Agreement signed in May 1996, Abbott
purchased, for $4.0 million, warrants to acquire 500,000 shares of common stock.
The warrants are exercisable for five years at $16.00 per share.
In 1994 and 1995, the Company issued warrants to purchase an aggregate of
321,539 shares of common stock at exercise prices ranging from $5.24 to $7.05
per share. The warrants expire at various times through July 2000. As of
December 31, 1999, warrants to purchase 63,650 shares of common stock remain
outstanding.
As of December 31, 1999, a total of 563,650 warrants were outstanding.
SHAREHOLDER RIGHTS PLAN
The Company has adopted a Shareholder Rights Plan ("Plan"). Under the Plan,
the Company's Board of Directors declared a dividend of one Preferred Stock
Purchase Right ("Right") for each outstanding common share of the Company. The
Rights have an exercise price of $140 per Right and provide the holders with the
right to purchase, in the event a person or group acquires 15% or more of the
Company's common stock, additional shares of the Company's common stock having a
market value equal to two times the exercise price of the Right. The Rights
expire in 2006.
8. EARNINGS PER SHARE
A reconciliation between basic and diluted EPS follows:
1999 1998 1997
------------ ------------ ------------
BASIC EARNINGS PER SHARE:
Net income (loss) ................ $ 434,670 $(11,173,284) $ 1,011,279
Weighted average common shares ... 8,836,406 8,621,759 8,565,658
Basic EPS ..................... $ 0.05 $ (1.30) $ 0.12
DILUTED EARNINGS PER SHARE:
Net income (loss) ................ $ 434,670 $(11,173,284) $ 1,011,279
Weighted average common shares ... 8,836,406 8,621,759 8,565,658
Dilutive potential common shares.. 132,998 -- 1,014,582
------------ ------------ ------------
Total shares ..................... 8,969,404 8,621,759 9,580,240
============ ============ ============
Diluted EPS ................... $ 0.05 $ (1.30) $ 0.11
As of December 31, 1999, 1998 and 1997, 2,090,529, 2,088,369 and 251,498
options and warrants, respectively, have not been included in the calculation of
potential common shares as their effect on diluted EPS would have been
anti-dilutive.
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9. COMMITMENTS AND CONTINGENCIES
The Company has leased office space and equipment under two operating lease
agreements which expire in April 2002 and April 2003, respectively. Under the
office lease, the Company has the option to extend the lease for an additional
three years at the then fair market value of the leased premises. Future minimum
lease payments under these leases are as follows:
2000 ........................................................... $ 584,730
2001 ........................................................... 612,684
2002 ........................................................... 186,726
2003 ........................................................... 13,878
----------
$1,398,018
==========
Rental expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $613,564, $564,000 and $458,000, respectively.
In May 1993, the Company entered into a manufacturing and supply agreement
with Abbott. The Company is obligated to purchase certain minimum quantities of
materials from Abbott or make cash payments for the shortages from the
predetermined purchase level over a five-year period subsequent to U.S.
regulatory approval.
In March 1998, the Company entered into a commercial supply agreement for
certain medical grade raw materials for the Company's initial product in the
U.S., EchoGen. The Company is obligated to purchase certain minimum quantities
of the material over a five-year period subsequent to U.S. regulatory approval.
10. LEGAL PROCEEDINGS
In January 1998, the Company announced they had filed a patent infringement
action in the U.S. District Court in Seattle, Washington against Molecular
Biosystems Inc. ("MBI") and Mallinckrodt Medical Inc. ("Mallinckrodt"). The suit
alleges that one of MBI's ultrasound contrast agents infringes one or more of
the Company's patents. MBI has filed counterclaims alleging that the patents
asserted by the Company are invalid and not infringed, and that the Company made
false public statements and engaged in other actions intended to damage MBI and
one of MBI's ultrasound contrast agents. The Company does not believe there is
any merit to these counterclaims and intends to defend its position vigorously;
however, there can be no assurance that the counterclaims will be resolved in
our favor. Discovery in the action is now substantially completed, and on
February 10, 2000, the Court issued an order granting the Company's Motion
Regarding Claim Construction and construing disputed terms in the patents the
Company asserted in the lawsuit. Both parties expect to file summary
judgment motions on various claims and defenses, and the trial date in the
lawsuit currently remains scheduled for April 24, 2000.
Under the Company's license agreement with Nycomed, Nycomed is an exclusive
licensee of the Company's patents in a field of use including
non-perfluoropentane ultrasound contrast agents. Nycomed has the right to
control the patent infringement portion of the Company's lawsuit against MBI and
Mallinckrodt. The court has authorized Nycomed to be joined as a party in this
lawsuit.
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In August and September 1998, various class action complaints were filed in
the Superior Court of Washington (the "State Action") and in the U.S. District
Court for the Western District of Washington (the "Federal Action") against
SONUS and certain of its officers and directors, alleging violations of
Washington State and U.S. securities laws. In October 1998, the Company and the
individual defendants moved to dismiss and stay the State Action. The state law
claims in the State Action were subsequently re-filed in the Federal Action. In
February 1999, plaintiffs filed a consolidated and amended complaint in the
Federal Action, alleging violations of Washington State and U.S. securities
laws. In March 1999, the Company and the individual defendants filed a motion to
dismiss the consolidated amended complaint in the Federal Action. In July 1999,
the Court entered an order denying in part and granting in part the motion to
dismiss the complaint in the Federal Action. In November 1999, the Company filed
motions for summary judgment and to stay discovery. On December 15, 1999, the
Court denied in part and granted in part the motion to stay discovery. The
motion for summary judgment is currently noted for July 10, 2000. The Company
does not believe there is any merit to the claims in these actions and the
Company intends to defend its position vigorously. Although the Company does not
believe that it or any of its current or former officers or directors have
engaged in any wrongdoing, there can be no assurance that this stockholder
litigation will be resolved in its favor. Any settlement or adverse judgment in
excess of available insurance could have a material adverse affect on the
Company's business, financial condition and results of operations.
11. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 outlines the SEC staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is currently evaluating the requirements of SAB 101 and assessing
its impact on the Company's financial statements.
In 1998, the FASB issued Statement of Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities (SFAS 133)."
In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133 (SFAS 137)." SFAS 137 deferred the effective date of SFAS 133
until fiscal years beginning after June 15, 2000. The Company does not currently
use derivative instruments, therefore the adoption of this statement will not
have any effect on the Company's results of operations or its financial
position.
12. SUBSEQUENT EVENT
In February 2000, the Company entered into an amendment with Abbott that
further modifies the Amended Abbott U.S. Agreement. The modified agreement
provides Abbott the option either to market and distribute EchoGen in the United
States subject to obtaining necessary regulatory approvals, or to terminate the
Amended Abbott U.S. Agreement, whether regulatory approvals are received or not.
Abbott's option terminates on March 31, 2000. No financial payments will be made
during the period of Abbott's option. If Abbott elects to market and sell
EchoGen in the United States, the parties have agreed to negotiate a revision to
the Amended Abbott U.S. Agreement by April 30, 2000 to reflect any changes in
responsibilities of the parties, the status of regulatory approval and current
market conditions. If Abbott elects to terminate the Amended Abbott U.S.
Agreement by March 31, 2000, Abbott will have no further economic or
54
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other responsibilities under the Amended Abbott U.S. Agreement and all rights
and marketing materials related to EchoGen will be returned to the Company. The
Company has also agreed with Abbott to amend the manufacturing and supply
agreement under which Abbott manufactures EchoGen for the Company. If the
Amended Abbott U.S. Agreement is terminated, Abbott will continue to manufacture
EchoGen following FDA approval for a period of two years, but in no event later
than July 1, 2002 under the manufacturing and supply agreement with Abbott.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required hereunder is incorporated by reference from the
section of our Proxy Statement to be filed in connection with its 2000 Annual
Meeting of Stockholders entitled "Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
The information required hereunder is incorporated by reference from the
section of our Proxy Statement to be filed in connection with its 2000 Annual
Meeting of Stockholders entitled "Compensation of Executive Officers."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required hereunder is incorporated by reference from the
section of our Proxy Statement to be filed in connection with its 2000 Annual
Meeting of Stockholders entitled "Security Ownership of Management and Certain
Beneficial Owners."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required hereunder is incorporated by reference from the
sections of our Proxy Statement to be filed in connection with its 2000 Annual
Meeting of Stockholders entitled "Compensation of Executive Officers" and
"Compensation Committee Interlocks and Insider Participation."
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The financial statements filed as a part of this Report are listed on
the "Index to Financial Statements" on Page 39.
(2) All schedules are omitted because they are not required or the
required information is included in the financial statements or notes
thereto.
(3) Exhibits
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------------------------------------------------------------- --------
3.2 Amended and Restated Certificate of Incorporation of the *
Company.
3.3 Certificate of Amendment of Certificate of Incorporation of the @
Company.
3.4 Amended and Restated Bylaws of the Company. *
4.1 Specimen Certificate of Common Stock. *
4.2 Rights Agreement, dated as of August 23, 1996, between the ***
Company and U.S. Stock Transfer Corporation.
10.1 SONUS Pharmaceuticals, Inc. Incentive Stock Option, Nonqualified *
Stock Option and Restricted Stock Purchase Plan - 1991 (the
"1991 Plan"), as amended.
10.2 Form of Incentive Stock Option Agreement pertaining to the 1991 *
Plan.
10.3 Form of Nonqualified Stock Option Agreement pertaining to *
the 1991 Plan.
10.4 Form of Restricted Stock Purchase Agreement pertaining to the *
1991 Plan.
10.5 SONUS Pharmaceuticals, Inc. 1995 Stock Option Plan for Directors *
(the "Director Plan").
10.6 Form of Stock Option Agreement pertaining to the Director Plan. *
10.7 1999 Nonqualified Stock Incentive Plan (the "1999 Plan"). @
10.8 Form of Stock Option Agreement pertaining to the 1999 Plan. @
10.9 Form of Restricted Stock Purchase Agreement pertaining to the @
1999 Plan.
10.12 License Agreement dated as of March 31, 1995 by and between the *
Company and Daiichi Company (portions omitted pursuant to Rule
406 of the Securities Act of 1933, as amended (the "1933 Act").
10.14 Contrast Agent Development and Supply Agreement dated May 6, *
1993 by and between the Company and Abbott Laboratories, Inc.
(portions omitted pursuant to Rule 406 of the 1933 Act).
10.14A Amendment to Contrast Agent Development and Supply Agreement *
dated August 22, 1995 by and between the Company and Abbott
Laboratories, Inc. (portions omitted pursuant to Rule 406 of the
1933 Act).
10.18 Lease Agreement dated January 17, 1994 between the Company and *
WRC Properties, Inc.
10.18A Amendment 2 dated October 28, 1997 to Lease Agreement dated @@@@
January 17, 1994
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58
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------------------------------------------------------------- --------
10.18B Amendment 3 dated October 15, 1998 to Lease Agreement dated @@@@
January 17, 1994
10.19 Form of Indemnification Agreement for Officers and Directors of *
the Company.
10.21 Loan and Security Agreement dated August 11, 1995 by and between *
the Company and Silicon Valley Bank.
10.21A Loan Modification Agreement dated September 10, 1997 to Loan @@@@
and Security Agreement by and between the Company and Silicon
Valley Bank.
10.21B Loan Modification Agreement dated August 31, 1998 to Loan and @@@@
Security Agreement by and between the Company and Silicon Valley
Bank.
10.21C Loan Modification Agreement dated August 30, 1999 to Loan and @@
Security Agreement by and between the Company and Silicon Valley
Bank.
10.22 SONUS Pharmaceuticals, Inc. Employee Stock Purchase Plan. **
10.25 Agreement between Abbott Laboratories, Inc. and the Company, ##
dated May 14, 1996 (portions omitted pursuant to Rule 24b-2).
10.26 Third Amended and Restated Registration Rights Agreement ###
dated as of May 15, 1996.
10.28 International License Agreement, dated October 1, 1996, by and ####
between Abbott Laboratories, Inc. and the Company (portions
omitted pursuant to Rule 24b-2).
10.29 Commercial Supply Agreement dated March 6, 1998 ++
10.31 Change in Control Agreement for Michael Martino ****
10.32 Change in Control Agreement for Gregory Sessler ****
10.33 First Amendment to Agreement by and between Abbott Laboratories ++++
and SONUS Pharmaceuticals, Inc. dated January 31, 1999.
10.34 First Amendment to International License Agreement by and ++++
between Abbott International, Ltd. And SONUS Pharmaceuticals, Inc.
dated January 31, 1999.
10.35 Securities Purchase Agreement between Abbott Laboratories and ++++
SONUS Pharmaceuticals, Inc. dated January 31, 1999.
10.36 License Agreement by and between Nycomed Amersham AS and the @@@
Company dated August 31, 1999.
10.37 Agreement for Part-Time Employment and Mutual Release, @@
effective August 25, 1999 by and between the Company and Steven
C. Quay, M.D., Ph.D.
10.38 Mutual Recission Agreement dated October 11, 1999 by and @@
between the Company and Abbott International Ltd.
10.39 Change in Control Agreement for John T. Flaherty, M.D. +
10.40 Amendment to the First Amendment to Agreement by and between +
Abbott Laboratories and the Company, dated February 3, 2000
23.1 Consent of Ernst & Young LLP, Independent Auditors +
24.1 Power of Attorney (included on the Signature Page of this +
Annual Report on Form 10-K).
27.1 Financial Data Schedule. +
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.1 1991 Plan. *
10.2 Form of Incentive Stock Option Agreement pertaining to *
the 1991 Plan.
10.3 Form of Nonqualified Stock Option Agreement pertaining to
the 1991 Plan
10.4 Form of Restricted Stock Purchase Agreement pertaining to *
the 1991 Plan.
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59
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------------------------------------------------------------- --------
10.5 Director Plan. *
10.6 Form of Stock Option Agreement pertaining to the Director *
Plan.
10.7 1999 Nonqualified Stock Incentive Plan (the "1999 Plan"). @
10.8 Form of Stock Option Agreement pertaining to the 1999 Plan. @
10.9 Form of Restricted Stock Purchase Agreement pertaining to the @
1999 Plan.
10.22 SONUS Pharmaceuticals, Inc. Employee Stock Purchase Plan. **
10.24 Employment Agreement, effective as of January 16, 1996, #
by and between the Company and Steven C. Quay, M.D.,
Ph.D.
10.24A Employment Agreement, effective February 11, 1999, by @
and between the Company and Steven C. Quay, M.D., Ph.D.
10.31 Change in Control Agreement for Michael Martino ****
10.32 Change in Control Agreement for Gregory Sessler ****
10.37 Agreement for Part-Time Employment and Mutual Release, @@
effective August 25, 1999 by and between the Company
and Steven C. Quay, M.D., Ph.D.
10.39 Change in Control Agreement for John T. Flaherty, M.D. +
- -------------
* Incorporated by reference to the referenced exhibit number to the Company's
Registration Statement on Form S-1, Reg. No. 33-96112.
** Incorporated by reference to Exhibit 4.7 to the Company's Registration
Statement on Form S-8, Registration No. 33-80623.
*** Incorporated by reference to the Company's Registration Statement on Form
8-A, dated August 23, 1996.
**** Incorporated by reference to the referenced exhibit number to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
1998.
# Incorporated by reference to the referenced exhibit number to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1996.
## Incorporated by reference to the referenced exhibit number to the Company's
Current Report on Form 8-K dated May 14, 1996.
### Incorporated by reference to the referenced exhibit number to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996.
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#### Incorporated by reference to the referenced exhibit number to the Company's
Current Report on Form 8-K dated October 1, 1996.
+ Filed herewith
++ Incorporated by, reference to the referenced exhibit number to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1998.
++++ Incorporated by reference to the referenced exhibit number to the Company's
Current Report on Form 8-K dated February 3, 1999.
@ Incorporated by, reference to the referenced exhibit number to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1999.
@@ Incorporated by, reference to the referenced exhibit number to the
Company's Quarterly Report on Form 10-QA for the quarterly period ended
September 30, 1999.
@@@ Incorporated by reference to the referenced exhibit number to the Company's
Current Report on Form 8-K dated September 28, 1999.
@@@@ Incorporated by reference to the referenced exhibit number to the Company's
Annual Report on Form 10-K for the period ended December 31, 1998.
(b) The Company filed no reports on Form 8-K during the quarter ended December
31, 1999.
EchoGen(R) is a registered trademark and PhaseShift(TM) is a trademark of
SONUS Pharmaceuticals, Inc.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, in the City of Bothell,
State of Washington, on February 29, 2000.
SONUS PHARMACEUTICALS, INC.
Dated: February 29, 2000 By: /s/ Michael A. Martino
--------------------------------
Michael A. Martino
President, Chief Executive Officer
and Director (Principal Executive Officer)
We, the undersigned directors and officers of SONUS Pharmaceuticals, Inc.,
do hereby constitute and appoint Michael A. Martino and Gregory Sessler, or
either of them, our true and lawful attorneys and agents, with full powers of
substitution to do any and all acts and things in our name and behalf in our
capacities as directors and officers and to execute any and all instruments for
us and in our names in the capacities indicated below, which said attorneys and
agents may deem necessary or advisable to enable said corporation to comply with
the Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
Annual Report on Form 10-K, including specifically but without limitation, power
and authority to sign for us or any of us in our names in the capacities
indicated below, any and all amendments hereto; and we do hereby ratify and
confirm all that said attorneys and agents, shall do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Michael A. Martino President, Chief Executive February 29, 2000
- ---------------------------------------- Officer and Director (Principal
Michael A. Martino Executive Officer)
/s/ Gregory Sessler Senior Vice President - Strategic February 29, 2000
- ---------------------------------------- Market Development and Chief Financial
Gregory Sessler Officer (Principal Financial and
Accounting Officer)
/s/ George W. Dunbar, Jr. Director, Co-Chairman of the February 29, 2000
- ---------------------------------------- Board of Directors
George W. Dunbar, Jr.
/s/ Christopher S. Henney, Ph.D., D.Sc. Director February 29, 2000
- ----------------------------------------
Christopher S. Henney, Ph.D., D.Sc.
61
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/s/ Robert E. Ivy Director, Co-Chairman of the February 29, 2000
- ---------------------------------------- Board of Directors
Robert E. Ivy
/s/ Dwight Winstead Director February 29, 2000
- ----------------------------------------
Dwight Winstead
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